How to develop your credit policy: A step by step “little bit different” guide
Did you know that the expression “giving credit where credit is due” can be traced back to a letter written by Samuel Adams in 1777 (that’s one of our American cousin’s Founding Fathers, not the iconic Boston beer of the same name)? It means to acknowledge some accomplishment performed by a person in circumstances where they may not fully deserve high fives (and that then leads to the expression “damning with faint praise” – but that’s a phrase for another day).
There is no doubt that allowing a Customer the privilege of credit terms will lead to increased sales. It is very easy to give your products away for free, so the trick is to ensure that any Customer or potential Customer is assessed, qualified, monitored and managed so your money is protected (yes, your products represent real money so start thinking in terms of the dollars that could be lost). We tell Clients that the biggest asset many organisations have is the value of the receivables. Hence, the way in which you manage that asset can determine the success or otherwise of the business and really impact on the bottom line.
So where to begin? As Stephen Covey says, “Begin with the end in mind”. The end game depends on what it is you are trying to achieve, what do you want to happen and is it realistic? We suggest a 3-step process that looks like this:
Starting with the end in mind (#3), the Outcome you want is a Credit Policy that:
- Sets out your organisation’s Policy directives from the order to cash process; and
- Details the process to be followed in all matters credit (including collections, write-offs and legal action).
Pretty simple but the next question is how do we get to there? This is where things get interesting, but first a war story:
It is the same with many things in life – if you don’t know where you are going, any road will do. The moral of the story is that you can probably find a credit policy template on the internet for free (or borrow a mate’s). But if you really want to nail your own Credit Policy then it’s time to “live the experience” and spend some proper time and effort looking at your structure.
Let’s now go to #1 (just for the heck of it). Why is this relevant to developing your Credit Policy? Because your roadmap to get there requires that you look closely at the core processes or activities (the Structure) that drive the outcome you want to achieve. If you have the right systems or structure in place, and you can get people to follow that system, then you can predict behaviour. The idea is to refine those activities so they are easy to implement and will assist your team to be more productive, ensuring a process that drives results.
Let’s look at this through a different lens – if the aim of your Credit Policy is to set out a structured process that everyone in the business can follow then it will lead to a better business. When we look at how a particular credit department is operating to assist clients, we often see disengaged people with low morale battling with inefficiencies within the department. There are many reasons for that but whatever the reasons, there needs to be change.
Yes, change. That word no-one likes but is recognised generally as being good for us (like a flu shot). We know exactly what insanity is – doing the same sh*t repeatedly and hoping for a better result. We know there are things you can never change, so you have to work on what you can control.
The activities are one thing you can control.
The activities that we’re talking about are:
- What credit criteria will determine whether to extend credit to a Customer;
- Who you are prepared to deal with (there are some Customers that you will not want, no matter how promising they appear to be);
- How you onboard a Customer;
- Who has authority to approve certain levels of credit; and
- When to extend further credit or start following up unpaid accounts.
We will look at many of these in detail next time but for now, let’s get the principle correct.
Having the right structure or activities in place will lead to predictable behaviour by the most important asset any business has – its people.
To remain consistent, let’s now look at #2. OK, let’s be clear, there is no such thing as a “bad” person. I can hear you now yelling, “You haven’t met Bob, Xi or Gupta, they would do anything for money – except work”.
OK, well most people in business want to achieve and to achieve there has to be some sort of system or structure in place (after all, who doesn’t need structure?). People work best when they can follow a well thought out and structured system. If your systems and structure are non-existent or “loose” then it can only lead to unpredictable behaviour, which is not going to get you anywhere (except maybe send you broke).
Often when goals are not being achieved, we are all too ready to blame the person and not the system or process. If you look carefully at the activities of your organisation and involve your team to improve each one, then you will get buy-in from an engaged team that will start achieving (and who doesn’t like to achieve? Did I mention that most people do? Good – trust me on this, they do).
Get the team to see the connection between the structure and the outcomes. For example, if you have collection targets then go back to how you deal with overdue accounts. Maybe a ‘customer service call’ before the due date might work with continual late payers. (I.e. “Just thought I would check, is everything OK with the product? Is there anything else we can do for you?”).
By actively engaging with your team on what they need to do and what is expected of them, they will follow your lead. If you want enthusiastic team members, you must bring that energy and enthusiasm yourself. The team reflects YOU so mould the team around what you believe will bring the most success to the business. Don’t forget you cannot set expectations that are higher than what you would set for yourself – you must be prepared to set the benchmark when it comes to behaviour. One warning bell: actively engage and focus on the majority, and they will come your way. For the minority who don’t wish to join in, you will have to manage them separately one-on-one. If after coaching and mentoring, you might have to admit the team is not for everyone and some members may be better off elsewhere. That is not a failure, rather an opportunity for both parties to find fresh pastures.
- STRUCTURE: Look hard at all of the activities your credit (and possibly finance) department does in the sale to cash process. How can these activities be made more efficient, easier for the Customer and the business? How can you do more with less?
- BEHAVIOUR: If you want to achieve your best result, you need to ensure people act in a predictable way and that their Behaviour is geared around activities that are easily understood and implemented. There is no room here for sloppiness, follow the process and see the results before your very eyes.
- OUTCOME: Your end goal of a Credit Policy cannot just be a cut and paste job. It requires some planning to develop the bespoke one that really works for your business and your industry.
- One last point – measure and monitor what you do on a regular basis, weekly, monthly, quarterly (daily?) and give progressive feedback. Everyone likes to know how they are travelling, and good work needs to be acknowledged and rewarded (even a home cooked cake will do if your collections aren’t that flash yet).
The development of your Credit Policy will take time but need not be Romanesque in its size or complexity. “Rome wasn’t built in a day” (really?) but “they were laying bricks by the hour” according to John Heywood, an English playwright in 1545. The Credit Policy can be a shared project for motivating and bonding of all team members and it can generate real money to the bottom line.
Next time we will go into detail about the activities that make up a structured policy. Once you pin those down, you will be able to really shape the outcome you want (and maybe need).
About the authors
Terry Ledlin is Special Counsel of Ledlin Lawyers, a boutique CBD law firm with 50-years of experience specialising in Credit Management and Collections, Commercial Litigation, Insolvency and Commercial Documentation. Terry is a practical and experienced lawyer who has worked with government agencies, private and publicly listed national and multinational companies across many industries. His speciality is helping to solve complex commercial issues.
Holly is a Lawyer at Ledlin Lawyers. At 6ft2 tall, the number one question Holly gets asked is, “Do you play basketball?” The good thing is, she’s a better lawyer than she ever was a basketball player. Holly takes advantage of her height in commercial litigation and dispute resolution, where a certain presence can often be key on and off the court (room). With her commercial approach, “slam dunks” are something Holly truly enjoys striving for in credit management and insolvency. Even on the bench, Holly is well-versed in great letter writing, drafting commercial contracts, and providing valued advice with the team at Ledlin Lawyers.