Your credit policy should be a vital ingredient of an overall business plan, so getting it right is important and involves balancing your sales targets with the cash needed to finance production, and stock holding. It must be a stabilising factor of your marketing and customer service departments: a clear statement of intention to both buyer and staff. Above all it must allow you to provide accurate:
- cash flow forecasts
- debtor level reports
- lines of responsibility
- internal communication.
Once written it must be discussed and, if necessary, rewritten and debated by management until you have a workable policy document aimed at improving your business.
A policy document, whichever form it takes, must also be an operation handbook for your credit control employees. The only secret to good credit management is sound information. Until required by the credit manager, this data ought to be arranged in four main categories, such as:
- General correspondence.
- Order, delivery and invoice copy documents.
- Credit risk information.
- Customer details and history files.
Using Credit as a Sales Aid
Trade credit can be an essential tool in marketing and selling your products. It should not be confused with point of sale credit which falls within the domain of consumer credit. The obvious use of credit to encourage a sale is to extend the period of credit. This will attract new customers, and assist existing ones to stock new lines, or help you break into fresh territories. This may be acceptable in the short term, to reach certain goals, let’s see what else can be done by the credit manager to encourage sales.
When a customer whom you have doubts about wishes to increase an order beyond their normal credit limit, the credit and sales people must get together so a sale can be negotiated with your customer which will not increase your risk exposure. Key questions to ask yourself are:
- Is the risk acceptable?
- Is extended credit necessary to retain or win business?
- Will the sale be profitable?
- Is an unacceptable precedent being set?
Only when you are happy with the answers to these questions should you proceed with the sale.
High risk customers
When dealing with high risk customers who wish to extend their credit, say, to £2,000 from an agreed limit of £1,000, a flexible approach is required. Your sales manager may be able to build into his sales contract one or all of the following options:
- discounts — offer a discount for paying on a fortnightly basis instead of 30 days. The higher sales volume will outweigh the costs (this should only be used in conjunction with the third option)
- security — negotiate for some form of security to be lodged with you
- account monitoring
- use credit insurance.
Whilst offering a discount is discouraged as a general rule, it does have its usefulness when used for specific customers to increase sales. Your credit manager may not wish to increase the limit from £1,000 to £2,000, but by using a two-weekly cycle for payment and delivery the risky customer can have two £1,000 deliveries per month. The cost to your profits must be considered in this instance against the cost to you, in case your risky customer goes elsewhere. With no orders, you have no profit, but see what can be gained by offering a reasonable discount.
If it is not viable to alter your credit terms to aid sales, another option is to ask for some form of guarantee from a third party. When dealing with a limited company or partnership, the directors’ or partners’ personal guarantees can be requested.
Retention of title
This is another form of security which you may find suitable for use with some customers. However, one or two problems can arise if:
- the product cannot be easily identified
- there is no cross-referencing to an unpaid invoice
- the purchaser has not agreed to the conditions of sale
- no serial number appears on the goods in question.
The wording of the clause of retention in the conditions of sale must not constitute a charge which would require registration to enforce, and it should be short and simple. It is recommended you seek advice from your solicitor before opting for this condition of sale.
Jenniffer Wilson is a writer at Qeedle.com She knows business processes and operations management inside out. As she understands all the challenges of running a small business firsthand, it’s her mission to tackle the topics that are most relevant to entrepreneurs and offer viable solutions.