What are Credit and Collections Policies and Procedures?
A solid credit and collections policy is essential for any business. It’s a document that outlines clear, written guidelines detailing terms and conditions for supplying goods on credit, customer qualification criteria, collection procedures, and steps to handle customer delinquency.
Simply put, it’s your playbook for managing credit and collections. This guide helps your team stay organized and consistent in their approach, ensuring that everyone follows the same rules and procedures to optimize resources, minimize credit risk, and boost overall cash flow.
Why is it Important to Have a Credit and Collections Policy in Place?
Accounts receivable (A/R) is a critical short-term asset for any company, right up there with cash and inventory. The more effectively and predictably you can convert A/R, the healthier your cash flow will be. Consistency is key to effective collections. By having a formalized plan and documenting all steps and communications, your team will be more consistent, effective, and efficient in collecting outstanding A/R.
A well-crafted credit collection policy will:
– Ensure continuity in the department if key personnel leave.
– Ensure all customers are treated fairly.
– Guarantee consistent credit decisions.
– Serve as a training tool for new sales associates and the credit and collections team.
– Ensure consistent procedures and execution across the credit department, sales, and management.
– Important to note: This policy is drafted before emotions are involved, not after an account has already gone bad and it’s harder to make clear-minded decisions.
Your policy can be as general or specific as needed. The goal is to protect your cash flow by arming your employees with knowledge and predefined best practices, so they always know how to react quickly and confidently to resolve problems or answer questions.
Keeping Your Credit and Collections Policy Up to Date
Once you’ve developed your collections policy, it’s crucial to update it regularly to ensure it remains relevant and effective. Ideally, this should be done annually. However, a recent survey from Credit Today revealed that many companies review their policies far less frequently:
– 19% review and adjust their policy every 2 years.
– 13% review and adjust their policy every 3 years.
– 15% only review and adjust their policy when needed.
– 12% indicated “other,” raising questions about the last time their policy was updated.
SMBs (small to mid-sized businesses) are often the worst offenders when it comes to neglecting their collections policy, despite being the ones who need a robust A/R strategy the most to maintain and grow their cash flow. Oftentimes these companies grow faster than their credit departments and this becomes a reason why policies aren’t updated to match their growth.
By keeping your credit and collections policy up to date, you can ensure your business remains agile and responsive, ready to handle any challenges that come your way. Not sure where to start? Check out our resources page and/or click here for a free template of our credit and collections policy.
