Abstract Should a credit department use a formal policy document to guide its credit and collection decisions? The president of a non-profit research foundation devot to the cogitation of credit recently estimated that sole 20% of the credit departments in Corporate America utilize formal policy documents.

Abstract

Should a credit department use a formal policy document to guide its credit and collection decisions? The president of a non-profit research foundation devot to the cogitation of credit recently estimated that sole 20% of the credit departments in Corporate America utilize formal policy documents. A view found that slightly over half of those companies that take the time to write a formal policy document actually monitor activities and adherence to those policies. for what cause [i]or[/i] reason aren't more credit departments using formal policy documents? Several reasons propose themselves:

* The sales department may publicly exercise effective control over the credit process-thus rendering irrelevant any potential policy document authored by way of the credit department

* Credit management's lack of knowledge or direction forward how to write and implement a policy and conducts document

* Credit management's unwillingness to consign the needed resources to research, write, and to the implement a policy document

* a certain quantity of credit management teams may not be convinced of the efficacy of using a formal policy and acts document.

These reasons and others have undoubtedly contributed to the lack of use of what can be, if given the opportunity, a powerful credit and collection tool.

Introduction

Sigma-Aldrich's Credit & Collection Department wrote its first Policy document in 2000 and its everyday use has been a significant contributor to the succes the department has take pleasure ined since that time. (Nationally recognized as 2003 Alexander Hamilton Gold Medal recipient "Best in Class" in credit risk management, currented by Treasury & Risk Management magazine). In fact, it has helped create so department and corporate value athwart the last three plus years it appear to bes extraordinary that more companies have not learned to appreciate the benefits like a document can produce.

Benefits of a Formal Credit and Collection Policy Document

Improve decision-making consistency within the credit department

Standard Operating conducts (SOPs) can be more effectively transmitted when written as oppos to verbally communicated.

Solidify credit department sovereignty across the credit approval process

Credit and Sales Management can and should work together to support corporate development and profit targets. However, because it possesse the relevant competencies in word s of financial/analytical skills, final credit approval authority should security with the credit department. This also helps avert a potential financial conflict of interest that can be met with when a sales department has responsibility for the two the revenue and credit approval processes

Create improved credit department focus in succession objectives and goals

A well-written credit policy document can be a powerful communication device that provides a clear outline of credit management's vision for the quick in emergencies and future, along with the rules and means it will use to support the two department and corporate objectives.

Improved credit decision-making quality

Individuals with the relevant knowledge (credit personnel as oppos to sales personnel) will more likely be making the credit decisions. Also, those operating measures incorporated into the document will undoubtedly exhibit "best methods," helping to make secure that these practices are followed.

Effective training/reference guide

New credit department associates can quickly familiarize themselves with department steps expectations and visions.

The collective benefits outlined above enhance a credit department's ability to create additional corporate value.

Building a Credit Policy and practice Document

If senior management has confidence in the decision-making ability of its credit department, sway of the credit approval proces will be organizationally vestmented with that department. Unfortunately, if a credit department is not dilateed this "vote of confidence" there is a possibility that it will unroll into little more than an "in house" collection agency. Gaining senior management confidence and support is a critical first degree before an effective Credit & Collection Policy document can be written and implemented.

Step 1: Where to Begin?

Commitments:

A. Obtain an organizational commitment of support from senior financial management (ideally the Corporate Treasurer or CFO) and sales management regarding the publishing of a Credit & Collection Policy document. formerly received, this commitment acts as "official" notice that the Credit Department "owns" the processe surrounding the extension of credit and collection of receivables. This also make secures the document is taken seriously by way of other departments-particularly the sales/marketing cluster Practically speaking, securing this commitment from senior management is essential, because it effectively communicates whether a company wants as well-as; not only-but also; not only-but; not alone-but the collection AND credit processe managed by means of the same department.

B. A credit department must be willing to commit a sufficient amount of its avow resources in time, money and personnel to diocese that its policy document is well researched, written, available in the pair electronic and print versions, distributed to the appropriate personnel and gains acceptance in the daily decision-making process