Credit Policy – from EOC

Eoc_logo_1  Because credit policy concerns the company as a whole, it is usually established officially by top management. Sometimes responsibility for its formulation lies altogether with top management, but more commonly the chief credit executive and associates play an active role in its development. The heads of other interested departments may also be consulted.

Credit policy is probably most effectively implemented when all who are directly affected have some voice in its development. A credit policy assures that there will be consistency across departmental functions. It requires the endorsement of top management, preferably the board of directors.
While credit policy is the cornerstone of credit administration, there is no exclusive acceptable format.

If a credit policy is to have practical value, it must be related to a specific company, reflecting the goals that the company has set for receivables management. Every credit executive is entitled to a written policy statement from the officers of the company—one that is fully understood and accepted by sales as well as credit people. An effective credit policy permits and encourages the fullest development of the opportunities in administering credit. It can be a blueprint for action as well as a training aid for the development of credit personnel. It provides the latitude to plan departmental operations within the scope of the company policy, to create effective procedures and techniques to implement that policy, and to establish adequate controls. It can assure that there is consistency in the company’s dealings and interactions with its customers, and it provides a means of recognizing the importance of the credit function to the company.

In general, there are several key questions that should be answered when developing a credit policy.

  • What is the credit department’s mission? This also can be called a vision or purpose. It states the overall objective for the credit function.
  • What are the goals? Goals can be specifically stated, such as a quantifiable measure, or more generally as an expressed desire to achieve improvement in a specific area.
  • What are the roles and specific authorities of the credit department management and staff? This defines the boundaries of the credit function, often in terms of interactions with other departments.
  • What are the primary criteria for evaluating customer credit? This describes credit procedures in more detail, listing key aspects of the credit review and analysis processes.
  • What are the normal collection procedures? This describes the steps to be taken in customer collection activities.
  • What are the company’s terms of sale? Terms should be spelled out by major product line, with any qualifications or restrictions included.

Read more about Credit Policy in the Departmental Operations section of the Encyclopedia of Credit.

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