Some Thoughts About the Proper Role of the Credit Department
By Karen Buckinham
1. The Importance of Being a Sales Oriented Credit Manager.
Companies expect their credit department to be sales oriented. Put simply,
this means the credit department should be looking for reasons to justify
establishing open account terms and/or releasing orders pending, rather than
looking for excuses to hold orders or to reject applicants for open account
terms. Having this simple idea in mind can make the difference between having
the credit department seen by senior management as a roadblock to the company
reaching its goals, and having the credit department and the credit manager
viewed in a far more favorable light.
2. Delivering Bad News to Customers. There is no good way to deliver
bad news to customers. One option to consider is to give the sales department
advanced notice - and give the salesperson the option of notifying the customer
himself or herself if they believe they are better able to do so. The goal
is to maintain as much goodwill as possible. An unacceptable credit risk
today might be an acceptable risk a month or a year from now.
3. Try to Avoid this Error. A credit manager can make a mistake by
arguing too strenuously when management overrides a credit decision. This mistake
can be made even worse of the credit manager insists that management go through
some elaborate process to document the fact that a credit decision was overridden.
The goal of the credit manager in this scenario should be to determine whether
the decision by senior management is a one-time aberration, or if it indicates
that a change must be made to the credit department's policies or procedures...
and specifically what changes should be made and how far should those changes
4. Changing Your Tolerance for Credit Risk. Even when the credit
manager believes that the best way to correct a decline in sales would be lower
credit standards and accept more risk, the credit manager should not make
this type of change unilaterally since doing so will inevitably lead to increased
bad debt losses and/or payment delinquencies for which the credit manager
and/or the credit department will be held accountable.
5. How Commissions are Paid Affects How Salespeople Deal with
Delinquent Customers. If salespeople have an incentive [aside from ensuring
that their customers are not placed on credit hold] to help the credit department
to collect past due balances, they are more likely to do so. Some companies
have modified their sales compensation plans to pay commissions and other
incentives only on the amounts collected from customers. Some companies that
already have this policy in place have taken it a step further and will pay
commissions only on invoices paid within a certain number of days of their
due date. This serves as an added incentive for the sales department to help
resolve disputes more quickly, and to "encourage" delinquent customers
to pay past due invoices sooner rather than later.
Karen Buckingham is Credit and Accounting Manager for a service company
that work with and for both consumer and commercial customers.
Reprinted with permission from the © 2001 Covering
Credit Newsletter 8/28/02 Edition,
All Rights Reserved