Credit Decision-Making

The credit department must make decisions and take actions to implement those decisions every day.  Some poeple enjoy being involved in the credit decisionmaking process.  Some do not - largely because in the credit field there are almost no absolutes - meaning there are no absolutely correct or totally incorrect credit decisions.  Some people acknowledge the uncertainty and welcome the challenge, and others do not.  A small number of individuals delegated the task of making credit decisions effectively freeze up and are incapable of making important decisions involving significant amounts of money in the form of offering credit terms exactly because the information available is insufficient to determine with sufficient certainty that the would-be customer has the ability and willingness to pay their debts to the creditor as they come due.

There are a number of factors that influence the credit decisions made by the credit department. In each company, the relative importance of each of these factors is different. What remains constant is the fact that credit managers do not operate in a vacuum unaffected by the goals, the problems, and the challenges facing the company they work for. Credit managers that fail to appreciate the needs of their employer will be seen as lacking in business acumen at best, and as expendable at worst. Some of the more important factors affecting credit decisions include:

1. Competition. Competition will affect your decisions relating to establishing a more lenient or a more rigid credit policy. The stiffer the competition, the more likely the credit policy will be more lenient.
2. Terms offered by competitors. Generally speaking, the longer the terms competitors offer, the longer the dating your company must offer in order for its products to remain competitive.
3. The laws of supply and demand. When demand for your company's goods and services exceeds supply, the credit manager can have a more conservative philosophy than when supply exceeds demand.
4. General business conditions. In a recession, business may be exceptionally slow. A liberal credit granting policy combined with relaxed collection efforts may be a way to increase sales revenues.
5. Changes in demand for your company's products. When demand for your goods and services is in decline, additional pressure will be brought to bear to liberalize credit granting to retain existing customers and to attract new customers.
6. The amount of bad debt losses experienced. If bad debt losses are higher than expected, senior management may insist on a more restrictive credit policy
7. Inventory levels. High levels of inventory tend to result in pressure to offer marginal customer larger open account terms. The same is true if inventory is seasonal, subject to spoilage, or is custom designed.
8. Profit margins. In theory, the higher the profit margin, the more credit risk companies are willing to take.
9. Market share goals and strategies. If your employer wants to increase market share, chances are good that credit terms will be one element of the negotiation process.
10. The experience of the credit department staff. The more experienced and educated the credit manager and his or her subordinates are, the more sophisticated the credit risk mitigation and management process tends to be.

Copyright 2010 by Michael C. Dennis, author of "1001 Collection Tools and Tips."