The Credit File; Keeping the Credit File Current

It is always problematic when an account becomes seriously past due or when a debtor company files for bankruptcy protection or otherwise fails to pay an outstanding debt. This problem is made worse when the credit department does not have current information in the customers credit file.

The department manager should establish clear rules relating to how frequently customer files should be reviewed and updated. In some instances, limited budgets constrain the credit department from performing updates as frequently as they would like. Nevertheless, the goal of every department should be to review each active account at least once each year. Of course, there are exceptions to this rule but the exceptions tend to shorten the review cycle time. For example, if a customer becomes seriously past due, then it would be appropriate to update the credit file before deciding whether or not to continue to extend open account terms to that once delinquent customer.

If you are forced to prioritize or limit the number of reviews performed on customer accounts, consider limiting your updates or reviews to: (a) new accounts, (b) accounts that have become severely delinquent and (c) customers with your largest open account balances. This way, you will be mitigating to the extent possible bad debt losses and serious delinquencies despite the constraints placed on credit department.

Every credit professional who has had constraints placed on her or his ability to update files on a regular basis to share their concerns with senior management about the additional risk placed on the company and the investment in A/R when the company’s credit files are not updated on a regular basis. If senior management understands and accepts the risks inherent in a decision to limit the resources, time, and money allocated to the credit department to update credit files, it is up to the credit department to do the best that can be done with limited resources available. On the other hand, if you are unfortunate enough to work for an organization which limits your ability to manage and control risk by updating credit files on regular basis - but nevertheless holds your department to high goals, it may be time to either make your concerns known more emphatically more to seek employment elsewhere.

© 2009 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "Credit and Collection Handbook."