Essential Functions for Your Credit Team

Your company’s credit department holds the key to converting revenue into income. Salespeople bring in the business, but those in credit actually collect the money. Whether this is two employees or several, without them finances would be a jumble.

In a company’s startup phase, the credit function often falls to management. Then, when business starts to take off and revenue goes up, it can easily become too much for one person to handle.

From the time a salesperson requests an order to the time payment arrives, the credit department is involved. The responsibilities of this department range from evaluating new customers and their ability to pay to determining payment terms and dealing with collections and delinquent accounts.

Credit departments are a vital part of every business and instrumental in keeping a company afloat.

Charles Brown is director of credit for New York-based Hapco Farms, LLC. He is well acquainted with the value of credit department functions and their importance to the bottom line.

For their company, Brown says the credit department establishes credit limits, performs billing and cash applications, and files and handles claims—all of which are vital to both the short- and long-term health of the company.

When a credit department is at the top of its game, it minimizes carrying costs (warehousing, inventory control, insurance, etc.) and maximizes profit.  In this article, we’ll address some of the most essential responsibilities for your credit team.

Due Diligence

When a member of the sales team has made a deal with a big buyer, they need the credit manager to sign off on establishing a substantial line of credit. The first step, of course, is for the credit manager to assess the customer’s creditworthiness.

Every potential customer should be vetted and required to undergo both credit and reference checks. If a company’s credit history is less than stellar, this information is vital. The simple task of verifying references is also essential in reducing risk.

When prospective customers want to buy product, the more data available, the better—this makes the credit analysis more accurate and shields the selling company from risk.

Since 2009, Blue Book Services has been providing lumber sellers with important, industry-specific credit information to help make informed decisions.  Blue Book’s proprietary ratings and credit scores provide the credit team with information from other sellers to augment what is learned from reference checks.

An Effective Credit Policy

Every credit department needs standards for setting credit and payment terms, and for what happens when payments arrive late. These policies are risk management tools and protect the company from customers that don’t pay on time or not at all.

Appropriate policies should adhere to a company’s mission and goals, and address how credit will be evaluated, the terms, and the collections process if a customer is delinquent.

All credit policies should be posted, available in writing, and include, at minimum, how to execute the following steps: (1) decide which customers will get credit and how much; (2) establish invoicing and payment terms; (3) determine when to start collections for delinquency; and (4) identify the processes that will be used to deal with slow pay or no pay customers.

Other factors to consider when devising a credit policy include company size, cash flow, and general economic conditions.

In the end, a solid credit policy should reduce bad debt and write-offs and lead to a boost in profits. But this shouldn’t be a one-and-done occurrence—the policy should be reviewed at least once a year and changed according to current risk tolerances and other industry factors.

Limits and Terms

The credit team also needs to establish a customer’s credit limits and credit terms.  Credit limits shouldn’t be random or vary broadly from other customers of the same type or financial status.  Nicole Flacco, the credit and collections supervisor for a large food producer, explains that their main objective is to balance their credit exposure with an appropriate credit line extension to maximize sales and profits.

By ensuring the amount of credit issued is appropriate for the customer’s financial standing, they can safely sell product on credit, Flacco says. “We know the customer is good for the credit, and the odds of collecting on the account are strong.”

Flacco further explains that the amount of credit extended is based on weekly sales averages and business need, which helps keep the customer’s payment timing within an acceptable trend.

Managing Collections

Brown considers accounts receivable or A/R as the biggest entry on any company’s balance sheet.

“Bad debt affects net income—and accounts receivable distributions (e.g., 30, 60, or 90 days past due) affect cash flow and the ability to pay bills on time and secure credit from your suppliers to expand sales,” he says.

Collections aren’t fun, but they are a necessary function of any credit department. The process generally starts with a phone call to the customer, and a written reminder asking the late payer to take action.

If nothing happens after a set amount of time, the collections process gets more serious. This may be tasked to individuals within a company’s credit department or outsourced to a collection agency.

“We review and analyze our A/R aging on a daily basis, keeping a tight control of our receivables portfolio to minimize those risks,” explains Cathy Jimenez, credit manager at Nogales, AZ based Del Campo Supreme, Inc.

Interdepartmental Collaboration

The relationship between the sales team and the credit department should be one of harmony, not fraught with discord or seeming incompatibility.

While it is true salespeople are most interested in finalizing sales, and the credit department is all about accounts receivable, there is middle ground. Both want to augment a company’s bottom line; they just have different ways of doing it. Each side needs to understand the other to succeed.

Brown reports that he works closely with his company’s sale team on approvals, limits, denials, and customer problems.

Jimenez is hands-on too, working with her sales department to prequalify credit customers, but she admits there can be some backlash if she doesn’t think a customer is qualified.

In these cases, salespeople should be reminded of the company’s credit policies and why they exist—as they protect the company and everyone who works there.

In Conclusion

Regularly reviewing processes and procedures and updating as needed will help the credit department run smoothly and stay cost effective.

And although certain expenses may seem superfluous when business is good and customers are paying on time, it’s important to remember: credit policies and the personnel who enforce them more than pay for themselves when things go awry.

A focused and determined credit team brings in the dollars that allow your business to thrive.

Source: Blue Book Services, Inc.