Do you know what the credit control policy of your company is? Do they have credit policies?
It is sometimes revealing to ask these questions. Firstly many companies do not have any written credit control policies – apart from the need to be paid as quickly as possible. Often companies that do have credit polices do not disseminate them through the company, as often sales as well as credit departments need to know what these are. Again management often think that they have good credit control policies in place, but when junior staff are asked they tell that they are not allowed to follow the polices or that they are unworkable.
Credit control policies should be well thought out and be known, and have support throughout the company.
Often agreements have to be accommodated between sales and credit departments. Credit managers want fixed clear guide lines that apply to everyone and sales departments want a referral for anything that will happen on an account. Neither of these are workable in any large company on a long term basis.
Credit policies that are too firm do lose sales for companies, and credit policies that are too relaxed do cause an increase in the cost of bad debts.
It helps if credit policies are realistic. The average, if a company gives credit, is 30 days and then the credit controller has 7/14 days leeway to have the account paid or it escalates to further action. Oneir Solutions Inc., for example, has 14 days built into its Receive Payment function when giving Early Payment Discounts.
The above is average, many multinational companies who supply goods to distributors take a payment at the end of the month for all goods ordered and delivered that month – often they will take this payment by direct debit – no exceptions – they do not allow anything to stop the payment, and they will charge interest on nonpayment at that day – the cost of credit for a day or two eats far into their margins.
Oneir Solutions Inc. provides for collection of outstanding accounts receivable through either direct debit from the customers bank account or by charging the amount to the customers’ credit cards. Many companies have high limits on credit cards, in lieu of using bank lines of credit to finance their short term payables. Prior to implementing this method for collecting the outstanding accounts receivable, you need to obtain a signed Pre Authorization Agreement with your customer. Appendix One is an example of one that Oneir Solutions Inc. uses for its purposes, but you should create one for your specific requirements.
There is a fee for charging payments to credit cards, either as payment for each invoice or at the end of the month; however, there is the benefit of having the funds in your bank account and the administration cost of collection calls and bad debts are eliminated…it is a trade off that each company needs to assess on their own merit.
Many companies encourage Early Payments and On-Time Payments using Early Payment Discounts, say 2%/10 Net 30 whereby the customer can take a 2% discount off the value of the products and services on the invoice. When Oneir Solutions calculated the Early Payment Discount, it is only calculated on the value of the products and not on extra charges, such as freight and also not on the sales taxes.
To assist with the enforcement of the Credit Policies, Oneir Solutions business management software allows flexibility with the application of these policies. For example, when taking an order, there is a visible aging of the accounts receivables at the bottom of the screen, as well as the approved credit limit. The order takers should be trained to note the accounts receivable status when the customer is placing their order. As we all know, the best time to get paid for overdue accounts is when the customer is looking for more product.
Oneir Solutions also will block order processing bases on the following criteria. Note that this criteria is dependent on the password level of the person entering the order.
Oneir will not only compare the customer balance with their credit limit, but also review the outstanding invoices for any overdue amounts. Overdue meaning anything that has gone past the terms of the invoice. If either condition exists, processing a sale in Sales Order will require a manager level password. In Point of Sale lower level users may still post the sale under these conditions but must receive payment in full. Putting even a portion of the invoice on “Charge” in these credit conditions will require a manager level password.
Of course, any implementation of the credit set up for the customer can be over ruled by senior management with authority to allow orders to be taken under specific situations.
The ultimate credit control authority is when a customer is placed on “Credit on Hold”. Oneir Solutions provides the ability to place a customer’s credit on ‘lock down’. When a customer’s credit is placed on hold, no invoice may be posted to the Accounts Receivable account, regardless of password level. Any invoice created must be paid in full or it may not be completed. “Credit on Hold” can be released either for an individual order or for the entire customer, when the account is deemed credit worthy once more.
Credit Terms Provided to Customers should be Reviewed Regularly.
Providing credit to a customer is a privilege and tool that sales staff use to secure customer orders; however, economic situations change and the customer that was very credit worthy several years ago may not have the same credit rating today. On a routine basis, the credit terms you have given to your customers needs to be reassessed.
Oneir Solutions provides stats on customer’s average payment history, largest invoice value, highest credit and the most important one, average days to pay, amongst other criteria to assist with flagging potential changes to a customer’s situation. In addition there are credit rating organizations and you can even solicit your staff, including the sales staff to provide warnings if they sense that the situation is changing with your customer.
Oneir Solutions Inc. has fully integrated Enterprise Resource Planning (ERP) software solutions to help you manage your credit policy but you need to:
• Have credit management policies documented
• The policies should be well known by all
• The policies should be agreed upon by all departments
• Credit control policies should be realistic, and
• Credit terms with each customer should be reviewed regularly
Effective credit management and control is one of the keys to secure financial health of a company. Be vigilant!
Oneir Solutions Inc. has fully-integrated Enterprise Resource Planning (ERP) software solutions, with all inclusive functionality and the broadest range of products. Grow your sales with our multi-channel sales approach and make your business more productive so you can do more with less…Making your overall business more competitive and profitable. That is why other businesses have chosen Oneir Solutions…And why your business needs Oneir Solutions as well.
Contact [email protected] or call 1-877-322-3580 Ext 1 to discover how Oneir Solutions Inc. ERP global software can make your company more competitive.
Read Accounts Receivable Management: Part IV Using Overdue Interest to Encourage On Time Payments
Read Accounts Receivable Management: Part III – Using Overdue Interest To Encourage On Time Payments
Read Accounts Receivable Management: Part I – Overview