Accounting Best Practices, Fifth Edition

7–26. Create a Credit Policy

One of the chief causes of confusion not only within the credit department but also between the credit and sales departments is the lack of consistency in dealing with customer credit issues. This includes who is responsible for credit tasks, what logical structure is used to evaluate and assign credit, what terms of sale are used, and what milestones are established for the collections process. Without consistent application of these items, customers never know what credit levels they are likely to be assigned, collections activities tend to jolt from one step to the next in no predetermined order, and no one knows who is responsible for what activities.

Establishment of a reasonably detailed credit policy goes a long way toward resolving these issues. A well-written credit policy should clearly state the mission and goals of the credit department, exactly which positions are responsible for the most critical credit and collections tasks, what formula shall be used for assigning credit levels, and what steps shall be followed in the collections process (though a true collections maestro might balk at the thought of using a boringly consistent methodology!). Further comments are as follows:

• Mission. The mission statement should outline the general concept of how the credit department does business—does it provide a loose credit policy to maximize sales, or work toward high-quality receivables (implying reduced sales), or manage credit at some point ...