Key Activities of the Credit Department; Role of the Credit and Collections Department

The credit function is an important component of any company's business operations.  Using creative methods when necessary to structure transactions so that sales can be approved, the credit department can make a significant contribution to sales and profit maximization. The key is knowing when and how to accomplish the sale safely. The key is to find the best way to minimize the risk of late payment or non-payment by customers. The core activities of the credit department include:

• Maximizing sales,
• Accelerating cash inflow,
• Minimizing bad debt losses,
• Reviewing and approving new accounts,
• Developing and updating credit and collection policies,
• Establishing appropriate credit limits and terms of sale for new and active customers,
• Creating new or more appropriate payment terms [terms of sale],
• Placing accounts on credit hold, and releasing orders from credit hold,
• Managing the collection function,
• Maintaining current information in the credit file on each active customer,
• Documenting credit decisions and actions,
• Performing financial analysis on customer financial statements,
• Researching and resolving disputes and deductions that would otherwise delay or prevent payment of accounts receivable,
• Communicating with other departments within the company including order entry, sales and shipping,
• Management reporting, and
• Safeguarding the company's investment in accounts receivable.

Collections and Credit Holds:  Customers occasionally overreact to a decision by a creditor company to place orders on credit hold.  However, most debtors understand the collection process that creditors use, and understand the risk they face when they delay payment.  Occasionally, the penalty for delaying payments to creditors involves a credit hold.

Collections and Credit Risk Management: Most collection problems and bad debts result from a flawed or inadequate initial credit investigation. It may be helpful to think of credit extension as making a loan to an applicant.  We know that a bank would not make a loan without a completed and signed application, and without a detailed understanding of the creditworthiness and financial worth of the applicant.  The care that banks take in approving loans should not be lost on trade creditors.  A creditor should not approve open account terms until there is sufficient documentation to show the applicant is creditworthy.

Edited by Michael C. Dennis.  Mr. Dennis is the author of "1001 Collection Tools and Tips."