Page 159 - Accounting Best Practices

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Collections Best Practices
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The only problem with this approach is that a great deal of intra-departmental
discipline is needed. The sales manager, in particular, must be able to carefully
plan in advance for upcoming sales campaigns and control the sales staff in fol-
lowing sales targets. In addition, this person must see the importance of setting
up credit levels in advance and must be able to work closely with the credit
department in granting appropriate credit levels. If this type of person is not run-
ning the sales department, it will be difficult to enforce this best practice.
Thus, planning carefully to grant appropriate levels of credit to customers
before the sales force contacts them is an excellent way to reduce the number of
customers the collections staff must contact.
Cost: Installation time:

7–19 CREATE STANDARDIZED CREDIT LEVEL
DETERMINATION SYSTEM

A common complaint of the collection staff is that there does not appear to be
any reasoning behind the credit levels that are granted customers, resulting in
inordinately high credit levels for some customers that cannot begin to repay
their debt. This results in considerable effort for the collections staff to bring in
cash from these customers, as well as pleas to the credit department to lower
credit to levels that have some reasonable chance of being repaid. This condition
is caused by the approach of many credit departments to granting credit, which is
that they grant the highest possible credit level to meet the latest order received
from a customer. This approach is advocated heavily by the salesperson who
stands to receive a substantial commission if the sale is approved. Consequently,
granting credit based on the size of a customer’s order rather than its ability to
pay leads to considerable additional collections work.
To solve the problem of an uncertain credit-granting standard, one must cre-
ate a procedure for granting credit that uses a single set of rules that are not to be
violated, no matter how much pressure the sales staff applies to expand credit
levels. The exact procedure will vary by credit department and the experience of
the credit manager. As an example, a credit person can obtain a credit report for a
prospective customer and use this as a source of baseline information for deriving
a credit level. A credit report is an excellent basis upon which to create a standard
credit level, for the information contained in it is collected in a similar manner for
all companies, resulting in a standardized and highly comparable basis of infor-
mation. Such a credit report should include a listing of the high, low, and median
credit levels granted to a customer by other companies, giving a credit manager
the range of credit that other companies have determined is appropriate. How-
ever, just using the range of credit levels is not normally sufficient, since one
must also consider the number of extra days beyond terms that a customer takes
to pay its customers. This information is a good indicator of creditworthiness and