Credit Granting Authority

Anyone with the authority to extend open account credit terms should have extensive experience in credit management, financial analysis, and credit risk mitigation. In most companies, only one or two people in the credit department are given authority to approve open account credit terms and/or to increase credit limits, and to release orders. Individuals with this authority must be assigned a specific dollar limit on his or her credit granting authority-including the credit manager. 

Before anyone is given the authority to make credit decisions on behalf of the company, they must be trained or must have proven expertise in the areas of financial analysis and credit-risk management. Employees without proven capabilities are normally introduced into the credit evaluation process gradually and under close supervision.  To control risk, companies often develop a chart of credit granting authority that might look something like this:

Title                                               Limit of Authority 

Company President                       Unlimited 
Chief Financial Officer                  $1,000,000 
Controller                                      $500,000
Credit Manager                             $250,000
Assistant Credit Manager              $25,000 
Sales Manager                              $0 

When credit granting authority is delegated, it must be made clear that requests or orders that exceed their credit granting authority must be forwarded to the appropriate person for approval and that violation of this basic rule will be grounds for disciplinary action up to and including termination. This should prevent accidental or deliberate violations of the rules established to safeguard the company's investment in accounts receivable.

Copyright 2016. Michael C. Dennis.  All Rights Reserved.