CHAPTER 4: CREDIT MANAGEMENT
Finance controllers and CFOs may need to agree to accept a Days Sales Outstanding (DSO) that is a little higher in order to ensure that the company achieves its greatest sales potential. Additionally, the controller and CFO need to understand that some late payments are due to discrepancies between the invoice and the customer’s agreement (and, as statistics reveal, the customer is often right). Not all companies pay the same. Today, large companies are negotiating extended buying payment terms that for many industries would be considered negative or derogatory. However, accepting those terms might pay off for a company’s overall business. Small businesses and consumers don’t have this type of clout. The solution is to create a systematic plan and formula that all credit analysts in the company use to decide a new or existing customer’s line of credit. This process does not need to be complicated. The process should be standardized so that application of the process is identical among all credit managers, is efficient so that the application can be completed timely, and is consistent with the company’s strategy.
The process should consider these factors:
1. The sales requirements of the customer 2. The size of the credit or open account 3. The nature of terms and payments 4. The anticipated frequency of interaction with the customer 5. The availability and access to information 6. The degree of automation: a. Consumer: Can they make electronic payments? Do they have e-mail and scanning capability? b. Business: Can all documents (POs, invoices, and payments) be exchanged electronically? 7. Security requirements, compliance, and audit requirements 8. If a business: Is the process is centralized, decentralized, or in a shared service center? Knowing where to communicate the various documents is a key to being paid on time. Is your company financially strong and looking to grow its market share? In this situation, the company may want to take more risk, such as granting a larger credit line to a strong customer or applying a greater risk factor to a customer with less desirable statistics and granting them a credit line. On the other hand, if your company needs to play it safe because it needs the cash now, it can look to other best practices such as taking credit-card payments to support sales while setting up a customer’s line of credit with little risk. Making credit decisions is not completely fact-based. Credit decisions also include the subjective assessment of the credit manager. This is especially true when it comes to making the best decisions for getting product and services delivered to as many creditworthy customers as possible while also taking on some calculated risk to ensure that products and services are not withheld from customers that may not look great on paper but would pay their bills given the proper terms.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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