Every organization who extends credit needs to have an effective credit policy, process, and procedure to protect their credit risk and to maximize cash flow.
Policy = rules, process = activities, procedure = specific instructions.
A better overall process certainly can drive sales and provide better customer value, but remember – profit isn’t true profit until you collect the cash!
Many companies I work with have a credit process, but it’s usually not formalized as a policy, process, and procedure. I strongly suggest all policies, processes, procedures be documented, reviewed/understood by your entire team, and used in training. It’s a great way to make significant improvements with operations – think efficiency, standardization, and franchise-like.
Outline your current credit policy, process and procedure; your external credit policies, your internal credit policies, and the credit granting and collection process and procedures. Spend time with your team for fully understanding and consistency – discuss improvements.
Forms used, depending on credit limits, generally include:
- Credit Application summary page with credit decision summary
- Credit Application
- Credit Agency report
- Credit Card Authorization
- Bank and Trade References
- Financial statements, tax returns, copy of driver’s license, etc.
Most companies I look at can do a much better job improving cash flow by formalizing their credit policy, process and collection procedures.
As one of your cash flow drivers, measure and track your DSO metrics, and develop improvement strategies to improve results.
Remember the power of the Days Sales Outstanding ratio (DSO). In an $8mm company, an improvement from 46 days outstanding to 38 days results with approximately $175,000 of improved cash flow! Get to 30 days and it’s a $350,000 pick-up in cash.
Profit isn’t usable until you collect the money!