CHAPTER 4: CREDIT MANAGEMENT
OVERALL SCORE (0-100) For electronic payments - net 30 terms; for check payment - net 15, due to cycle time to process. Use test cases of existing and past customers to prove whether the in-house scorecard is effective and achieves a standard that supports the credo and the ethics policy of the company, as well as the cash-flow projections. Even though you try to make decisions based on facts, there is always some degree of subjectivity (emotion) involved. Can you trust this customer to pay and pay on time? Use an in-house scorecard so all customers are analyzed with the same process and with a systematic, weighted formula to provide a credit limit and terms without discrimination. For example: High-Risk Account: Use credit card, CIA, COD; try to never assign COD, but aim for credit card payment. Borderline Account: Give a small credit line (take a little risk) or credit card for six months, and then convert to open terms. Good Account: Assign appropriate credit line. Even if financials are very strong, make sure you don’t overextend credit. Make sure the amount does not exceed the customer’s ability to pay. Remember, you are not their only supplier and they need to make overhead, improvements, and so on—there are other competing claims on their money. Excellent Account: Open the line of credit based on potential sales. Never assign unlimited credit. No analysis is perfect. As with subjective and non-verified data, there is interpretation involved. As you move to more objective verification and a systematic assessment, you will achieve more consistency and objectivity. Determining the company’s risk factor to promote sales is critical. Otherwise, you may be leaving money on the table. Setting the credit limit and terms can make or break your company—you are effectively loaning your company’s funds to the customer. Too little credit keeps your product in the warehouse. Too much credit that cannot be collected can put your company out of business. Credit management requires time on the job to perfect the decision process. This is why a second-signature review of how the credit line was assigned is important to its success, and to improving the credit manager’s skills. Depending on how much credit you allow, there will always be bad debt. If there isn’t any bad debt at all you may be turning away valid orders that would increase the profit margin. Just because a potential customer has a high credit score does not mean they will pay on time. Likewise, if a consumer or company is struggling it does not mean that they will pay you late. In the business world, a customer with a high credit score could be growing at a fast pace and their internal processes cannot keep up, so they pay late. Conversely, a struggling consumer or company may have the goal of improving their credit score since it directly relates to their continued success, so they pay on time.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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