Credit Policy and Procedures

The economic outlook for the year ahead is bleak. Some analysts have forecast that the second half of 2008 will stay mired in the doldrums with annualized growth not returning to near-normal levels until sometime in 2010. Federal
Reserve Board Chairman Ben Bernanke has said the U.S. inflationary picture is shrouded in uncertainty and the maelstrom that resulted in the housing market buckle and the credit freeze has yet to subside.

Nonetheless, business must press forward.

Most companies have set certain tolerance levels for their risk appetite based on factors such as position in the marketplace, margins, sales channels, as well as the creditworthiness of a particular customer. For most credit professionals, the stark reality is that there are simply accounts to which they must sell, no matter what. Credit reports are an aid, as are other tools, but there also must be a tangible set of credit policy and procedures in place.

“How many of us really decide which customers are sold to?” asked Susan Delloiacono, CCE, director of credit, Brother International Corporation, at the CMA-sponsored teleconference “Credit Policy & Procedures.”

“In my experience, some of my customers are not my choice by a long shot. Rather, I have to find a way to deal with everyone that’s presented to me.”

Delloiacono’s presentation focused on cobbling together the “bones” for attendees to develop their own credit policies, instead of merely creating a point-by-point template to which members could try and fit their businesses. She discussed that it’s difficult as a credit person to try and utilize a generic credit policy outline because factors like terms are typically dictated by the sales department and there are accounts that executives will press credit managers to accept. Furthermore, there are times when customer delinquencies are viewed differently.

“A policy that mandates and dictates certain behaviors always has to have an exception-based rule. At least that’s what I’ve found in my experience,” said Delloiacono. “We’re flooded with information from the Internet, from alerts we’ve set up in the credit world. It’s so much information that it’s hard to put that all into a funnel and have it come out and translate into a one-size-fits-all policy.”

She added, “Money is tightening up. And credit is really getting a spotlight at this point in time. I think we all agree that there’s tension within our own companies with the attention on being paid. Accounts receivable and credit extension practices are under scrutiny.”

For most credit professionals, she suggested that there has to be a sort of double-vision in place: one view that takes in the macro economic picture, and one view that examines the micro or localized picture, the structure within their own company.

“In the global marketplace, many things from wars to fuel are creating uncertainty,” said Delloiacono, who suggested credit managers ask themselves: how does that affect me? “Look at the global marketplace and be aware of what is around you. Sometimes as credit people we can be very binary—just looking at the ‘yes’ and ‘no’ of a credit decision without really considering all of these external factors.”

With consumer confidence waning, consumer spending has been reined in, with non-discretionary spending being severely impacted by surging energy costs and plummeting home prices. The overall implications are broadly felt as capital and cash flows of businesses in turn have continued to get tighter.

As to relationships within their own companies, Delloiacono cited that credit managers need to consider broadening their view.

“As credit people, there are some departments that we don’t interact with, but we should,” said Delloiacono. “Our sales department; that’s a no-brainer. We know we are dealing with sales; we know we are dealing with order management. Somehow or another, we don’t look at product development as something we need to concern ourselves with. And that’s a mistake for credit people to take that approach. It’s important for you to understand where your company fits and what solutions they have planned for in the future.”

For developing a credit policy she said this was paramount knowledge.

“My counsel to you is to know your business,” said Delloiacono. “Is your company sales- or top-line driven versus
profits, profits, profits? That dictates how you’re going to react in the credit granting area. If you are really bottom-line driven, you may be really tough on credit and softer on collections. If you’re soft on credit, typically you’re
working for a very marketing-driven company; a very sales-driven company that’s like ‘ship it, ship it, ship it.’ If you have that kind of attitude, you better be tough on the collections side.”

Another consideration for credit professionals is whether the company they work for is public or private. Do they
deal with Sarbanes-Oxley (SOX) issues? That will likely dictate how a lot of a credit policy is interpreted and what procedures the credit manager is going to have to have in place to support those overall SOX initiatives.

Delloiacono also said it was imperative that credit professionals know their industry and become a member of an industry credit group, and that credit managers incorporate their knowledge of how the current economic factors of
their company can be used to maximize sales, minimize carrying costs in accounts receivable, minimize bad debt and monitor costs.

“If we look at what our job is as credit people, it’s just those four things,” said Delloiacono. “Those four components are key to setting credit policy.”