Credit Policy
The most companies have their own procedures, guidelines and policies, . It is unbelievable that any two firms will define them in a same manner. Furthermore, while many individuals take account the need for a workable set of regulations. Policy "carries some negative intentions of bureaucracy and inflexibility.
A traditional credit policy address the below mentioned points:
Credit limits:
Investor establishes dollar figures for the amount of credit and are willing to broaden and define the parameters and circumstances.
Credit terms:
If investor is in agreement to bill a customer, then there is need to decide when the payment will be due.
Deposits:
Investor may need customers to pay a portion of the amount due in advance.
Personal checks and credit cards:
Investor bank is a good resource for credit card merchant status and for adjusting policies regarding the acceptance of personal checks.
Customer information:
It should outline what investor want to know about a customer before making a credit decision. It include length of time at present location, years in business, credit rating financial data with other vendors and credit reporting agencies, information about the individual principals of the company.
ñ Documentation:
This comprises sales agreements, invoices, correspondence, contracts, credit applications, purchase orders, bills of lading, delivery receipts, etc. A policy is a course of action developed for recurring situations, designed to achieve established targets. Investor examines the need and benefits of such a credit policy, the grounds for different approaches in different organizations and the need for supplementary procedures. Investor will then develop a sample policy, altogether with some certain procedures, which can be easily modified for their own requirement of company.
There are 4 reasons to have a written credit policy and they each add to the productiveness of entire organization. These are:
i) The responsibility of managing receivables is a serious. It comprises limiting bad debts and improving cash flow. With prominent receivables often being a firm's major asset, it is obvious that a structured approach to credit management is required.
ii) A policy ensures a degree of consistency among departments. By writing down what is anticipated, whether marketing, production, or finance will realize that they have a common set of goals. In converse manner, a written policy can delineate each department's functions so that duplication of effort and unnecessary friction are ignored.
iii) It allows a consistent approach among customers. Decision making becomes a logical function based on predecided parameters. This modifies the decision process and yields a sense of fairness that will improve customer relations.
iv) It provides some recognition of the credit department as a separate entity, one is worthy of rendering input into the overall strategy of the firm. This permits the department to be an significant resource to upper management.
Credit policies differ in both content and length. About length, some are as short as several paragraphs, whereas others can go on for many pages. One might suspect, there are rewards and drawbacks to each approach. In a positive sense, a detailed policy departs little room for doubt. Procedures are spelled out and employees are required only denote to their manual to know how to perform. There will be no gray areas among departments and consistency will dominate.
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