Finance Guide: How to Create a Smart Credit Policy. Long ago, merchants figured out how to create customers where none existed: credit. For most companies, offering trade credit isn't optional: When your competitors do it, you are at a disadvantage if you don't - - and on similar terms. Of course, granting credit has costs. There is the expense of capital - - either the actual cost of borrowing or the opportunity cost of lending, given that money advanced to the client could be put to other uses. There are the administrative costs of creating statements and collecting. Finally, some customer debt will go bad. A business can mitigate these costs by establishing a smart credit policy and then carefully managing accounts receivable. Xpress Enterprises, a trucking company in Chattanooga, Tennessee. The pages that follow will get you started. You may find yourself mediating between a sales team that's pushing to extend more credit and an accounting department urging prudence. Get a Handle on the Basics. Credit policy should be tied to your sales strategy, says Doug Swafford - - more aggressive goals demand a looser spigot. Whatever your goals, the particulars will need to at least match the standards that prevail in your market for your business to be competitive. Islamic clothing by SHUKR Islamic clothing for contemporary Muslim women and men. Info Pages Returns, Exchanges & Store Credit Policy. Sample Business Credit Card Use Policy. Business Slideshows Japanese Business Culture Curriculum Vitae Template Trending in Business. Examples of Recommendation. Online Store Returns & Exchanges. Our standard return policy plus the following. A store credit will be issued for the value of the voucher. Give your store some extra power with our premium PrestaShop extensions. Template catalog designed around conceptually inspired brand identity. Why Free Sample Policies and Procedures Template? So what does a typical sample procedure template look like? What does a specific Policy manual cover? Set the terms of sale. Two kinds of credit predominate in the business- to- business world. Open credit requires no down payment and levies no interest or carrying charges. The payment is simply due in full on the specified date, typically 3. Revolving credit, on the other hand, sets a limit on how much a customer can borrow. The customer pays interest only on the principal actually borrowed; as the debt is repaid, the credit available increases. In addition, the terms typically include discounts for early payment; a common incentive reduces the bill by 2 percent for full payment within 1. You will also want to stipulate other aspects of the transaction, such as delivery obligations or remedies if a customer fails to pay the debt. Conditions typically include the right to pass on legal fees and collection costs to the customer, as well as the right to establish the venue and jurisdiction for legal action. Requiring the customer to inspect merchandise upon delivery and make objections promptly also strengthens your hand should the account go bad. Commit your policies to writing. This offers some protection against lawsuits. Federal law prohibits manipulating credit terms as a means of indirect price discrimination. Courts, he says, rarely second- guess credit decisions made in good faith. Create Guidelines for Granting Credit. The amount of credit you grant - - and who gets it - - reflects your tolerance for risk. Why take any risk at all, especially now? Everything you need to know to make your returns policy work for you and help your customers. Plus, check out our refund policy template. This page is designed to help businesses, especially BBB Accredited Businesses, create an online privacy policy for use on the Internet. When a business is conducting. Because doing so may increase your market share or win customers that will eventually bring you more business. And if the profit margin is high enough, you might come out ahead even if the customer later defaults. Swafford recalls one high- risk customer who defaulted eight or 1. Federal law obliges you to judge all applicants against the same standards, but you need not always go to the same length to verify creditworthiness. A small company, says Kobre, can rely on the CEO's judgment. As more buyers apply for credit, it's a good idea to standardize your evaluations. The easiest way to check a customer's creditworthiness is to call two or three of its other trade creditors - - ideally in your industry - - and ask how promptly the customer pays. Credit Policy Example. The credit department shall offer credit to all customers except those for whom the risk of loss is probable.Ask the customer's banker if the company's lines of credit are in good standing. If you are talking about a very large credit limit, require financial statements and written bank and trade references. If you deny credit, the law requires you to give an explanation if asked. A new customer should pay up front or on delivery. When you grant credit, keep the limit low initially and monitor the transactions in the first year. Manage the Books. The key metric in managing accounts receivable is how long, on average, it takes your customers to pay their bills. In general, be concerned if your average collection period is a third longer than the period established in your credit terms (4. For a quick snapshot of the average collection period (also called days sales outstanding), divide outstanding accounts receivable by average daily credit sales. This does not account for fluctuations over time, and there are more precise (and complicated) calculations for average collection period, but it is a good rule of thumb. Seller beware. It's also crucial to zero in on individual customers. Not only may they be more likely to spot and resolve problems early, but a strong relationship with the customer may smooth the intervention. Play it safe by updating and reviewing credit files for all accounts at least semiannually. If you require financial statements, get new ones every two years. Collection calls. In the case of delinquency, be prompt and persistent. Your written policy should specify contact at regular intervals, starting with a reminder five to seven days after the due date. Further notice should escalate: A second written reminder might be followed by a phone call, followed by a final notice from a lawyer. If you still haven't been paid 3. Craft a Credit Application. A credit application doesn't need to be long, but it should be carefully worded - - it is, after all, a legal contract. Be sure the customer provides the company's legal name and entity type, as well as the names of principals. If the business structure shields the company's owners from liability, you may want to extract a personal guarantee. Ask for the contact info - - telephone and fax numbers and e- mail and home addresses - - for the principals, as well as for the person who will probably be your main contact: the accounts payable manager. Ask for trade references, ideally in your industry, who can speak to completed transactions with the prospect. Seek bank account informationand contacts. Some lawyers recommend including a form that authorizes a bank to release the customer's records. Include the terms and conditions, written so that the customer has to acknowledge agreeing to them - - and require a dated signature. Evaluating Creditworthiness. What to look for in a prospective borrower's balance sheet? Doug Swafford, who has spent more than three decades managing lines of credit, likes to keep it simple. The bottom line: Is the company profitable? The cash- flow statement: Is cash flow positive - - i. The receivables and payables balancing test: Calculate average collection and payment periods by comparing accounts receivable with operating revenue and accounts payable with costs. Then, determine how fast the company pays its bills. Its Useful Sites page has a primer on credit applications. The Federal Trade Commission (ftc. Guidance tab of the Competition section of the website. The Virginia- based law firm Fullerton & Knowles offers free form downloads, including a credit application and a response form, at fullertonlaw.
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