To develop effective credit policy and procedures
LAYING THE GROUNDWORK
If you've assessed your cash flow needs and decided that extending credit can be good for your business, you're ready to develop the credit policies and procedures that are necessary for a successful small business.
Know the Laws
Before you start extending credit, familiarize yourself with the various laws related to this subject. Obtain copies of the Federal Government's Bankruptcy and Insolvency Act and the Consumer Protection Act of your Provincial Government. Make sure you understand how to protect your rights and how your customers will protect theirs. Also obtain a copy of the Collection Agencies Act to learn about dos and don'ts of the collection process.
Get Organized
Whether it's a department of one or 21, you should dedicate staff to your credit function and assign responsibilities. Here's what you'll need to do:
- If you don't have one, set up a computer-based accounts receivable system. If you do, review it to see if it needs to be upgraded.
- Establish your credit policy including terms and criteria to help assess a customer's ability to pay.
- Identify a credit information provider and develop customer profiles.
- Establish a collection policy for initiating action on past due invoices.
Establish Your Credit Policy
Your credit policy guides employees who manage the credit process. You should evaluate the effectiveness of the policy on a regular basis and promptly communicate changes to employees. Your policy should cover:
- Circumstances under which you will extend credit
- How to assess the amount of credit to extend
- Available terms and conditions that may warrant a change in terms
- Whether you offer discounts for early payment and/or penalties for late payment
- When to initiate the collection plan
Develop a Credit Application Form
Experts recommend that the following information be included on your credit application form:
- The company's full legal name and address
- The form/type of business
- Length of time the company has been in business
- The company's bank
- A list of the company's suppliers for reference purposes
- A list of current assets (e.g., inventory, cash on hand, accounts/notes receivable) and fixed assets (e.g., buildings, land, fixtures, equipment)
- A list of current liabilities (e.g., accounts/notes payable, accrued taxes, payroll accrued) and long-term liabilities
- Value of leased machinery or equipment
- Net worth
- Most recent audit and dates of latest inventory counts
- Amount of insurance coverage (e.g., liability, fire)
Establish A Collection Plan
No matter how carefully you choose your credit customers, late payments will sometimes be an issue. Be sure you have a system to flag aging receivables that will put your collection plan in motion. And be certain your action plan conforms to applicable credit laws.
Before you take action, ask your credit contact at the company if there is a reason for the delay in payment. If your contact can't shed light on the matter, address your correspondence to the person with the authority to pay. Here is suggested language for your notices:
5 to 7 Days Past Due - Send a Reminder.
Assume that the bill has simply been overlooked: "Your payment of $100 has not yet been received. If you have already sent your payment, please disregard this reminder. If not, please remit promptly. Thank you."
15 to 21 Days Past Due - Start a Conversation.
Be diplomatic: "Your payment of $100 is overdue. If there is a problem, perhaps we can work out a payment plan. As you know, we are unable to sell additional goods until the overdue invoice has been paid. When can we expect your payment?"
45 Days Past Due - Give a Deadline.
At 45 days if the invoice remains unpaid: "Your account is overdue. You have not responded to our earlier requests for payment. This is a final reminder. If we do not receive payment within 7 days, we regret that it will be necessary to take further action."
60 Days Past Due - Make a Final Attempt.
Now it's time to inform the customer that you have engaged a collection agency: "We have made several requests for payment on your past due invoice without a response. We have referred this matter to a collection agency." |
