This article originally appeared in Credit Today, the leading publication for the credit professional.
A truly effective credit department should operate with a central, driving mission statement, surrounded by the four specialized activities of credit approval, billing, collections, and monitoring. Before being able to set goals for these four activities, though, you need to create your mission statement–your “vision” of what you want the credit department to be and do. While most credit departments have forms, job descriptions, copies of letters, and memos, very few have formal written mission statements (visions) or the subsequent activities, policies and procedures that outline and reinforce these mission statements.
Before creating your mission statement, you first must define what credit is. Ask some credit managers, and you may get answers such as:
- “The ability to pay”
- “The willingness to pay”
- “Faith and trust”
These are indeed factors in the credit approval process, but they do not define what credit is. Credit is “the selling of a product or service based on payment at a later date.”
Why even have a credit department? After all, it’s a cost center, isn’t it? It consumes resources in
- Administration. These include the costs of credit checks, sending invoices, etc.
- Accounts receivable. Sure, you can borrow from the banks based on the strength of your A/R to a point, but this only drives up your debt service cost.
- The potential for bad debt loss.
In view of these costs, why even extend credit in the first place? Why not just demand full payment? Most credit managers respond to these questions with answers such as:
- “My customers require it. They’re unable to pay all at one time.”
- “I sell to customers who extend credit to their customers and therefore can’t pay us until they get paid.”
- “Our competitors extend credit, so, in order to remain competitive, we must also extend credit.”
In one sense, these are slightly different answers, but in another sense, they are all saying the same thing. That is: The only reason to extend credit is to make a sale that would otherwise be lost. And, getting back to our earlier definition, credit is “the selling of a product or service based on payment at a later date.” The key word in this definition is “selling.”
So the true mission statement and vision of the successful credit department must be to use credit tools and activities to make sales that would otherwise be lost. This takes credit out of the “cost center” arena and places it squarely where it belongs–as a profit center.
Thanks to Credit Today’s Tip of the Week.