Establishing the Appropriate Credit Risk Environment

To establish an appropriate credit-risk environment, the company President or the CFO should periodically review the company's credit-risk strategy and credit policies to confirm that they reflect the company's tolerance for risk, and will support the level of sales and cash flow that the company needs.

The credit manager is responsible for implementing the credit-risk strategy approved or established by senior management. In addition, credit professionals remain responsible for developing and implementing policies or procedures for identifying risk, as well as for measuring, monitoring, and controlling risk. Credit granting authority and credit granting criteria should be carefully documented and thoroughly understood by everyone with authority to extend credit or release orders.

Credit professionals should have a written process for approving new accounts, as well as for periodically re-valuating existing customers. In addition, creditors should update the entire active account portfolio at least once a year. You should also evaluate customers on the basis of their degree of credit risk and assign scores or ratings accordingly. Customers identified as high risk should be subject to more stringent follow-up if and when the account becomes delinquent.

Source: "Credit and Collection Manager's Manual" edited by Michael Dennis and Steven Kozack.