O'Reilly logo

Accounting Best Practices, Fifth Edition by Steven M. Bragg Englewood, Colorado

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

7–31. Create Standardized Credit Level Determination System

A common complaint of the collections staff is that there does not appear to be any reasoning behind the credit levels granted to customers, resulting in inordinately high credit levels for some customers that cannot begin to repay their debt. This results in considerable effort for the collections staff to bring in cash from these customers, as well as pleas to the credit department to lower credit to levels that have some reasonable chance of being repaid. This condition is caused by the approach of many credit departments to granting credit, which is that they grant the highest possible credit level to meet the latest order received from a customer. This approach is advocated heavily by the salesperson who stands to receive a substantial commission if the sale is approved. Consequently, granting credit based on the size of a customer’s order rather than its ability to pay leads to considerable additional collections work.

A solution is to create a procedure for granting credit that uses a single set of rules that are not to be violated, no matter how much pressure the sales staff applies to expand credit levels. The exact procedure will vary by credit department and the experience of the credit manager. As an example, a credit person can obtain a credit report for a prospective customer and use this as a source of baseline information for deriving a credit level. A credit report is an excellent basis upon which to create ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required