Credit and Collection Operations PDF

Credit and Collection Operations (functions, goals, reports, and issues)  CREDIT CLERKS  THE CREDIT CONUNDRUM - Credit clerks must have a thorough - Can only be avoided through...

Credit and Collection Operations (functions, goals, reports, and issues)  CREDIT CLERKS  THE CREDIT CONUNDRUM - Credit clerks must have a thorough - Can only be avoided through ongoing understanding of financial statement support of senior management, which analysis and how it relates to the must understand the key role that the granting of credit. credit department plays. - Key elements of this position: Process credit applications from new  THE COLLECTIONS JANITOR ROLE customers - Collection management requires Conduct trade and bank reference expertise in dealing with other checks departments, as well as collection skill. Establish credit limits based on credit criteria  ORGANIZATIONAL STRUCTURE Maintain records of credit reviews and - Two functions be combined into a document reasons for credit limits granted single department. By combining under Monitor credit usage by existing common management, time required to customers resolve customer problems will be Monitor financial and credit condition of shortened. customers Review existing credit limits at regular  CREDIT MANAGER intervals Provide credit information to - The credit manager should have significant third parties upon request experience in credit granting field and excellent knowledge of credit scoring  COLLECTIONS MANAGER systems, financial analysis, and how credit - A key aspect of this position is to related laws may apply to business. Also, standardize the process for contacting significant interpersonal skills, to deal with customers, one in which boundaries for the sales department and customers on a acceptable collection behavior are firmly daily basis. enforced and customers are uniformly dealt - Responsible for: in a manner that abides by all applicable Credit granting process laws. Consistent application of a credit policy - Responsible for: Periodic credit reviews of existing All collections activities including customers interactions with customers and Assessment of credit worthiness of management of collection agencies and potential customers collection attorneys. - Reports to: Gathering information about collection Treasurer or Chief Financial Officer problems and passing the information Should not report to any position in the to the rest of the company for resolution sales department. (Credit function should Reports to: act as a counterbalance to sales Usually reports to controller department)   COLLECTION CALL PREPARATION - have  COLLECTOR new hires act as assistants to more - Responsible for: experienced collectors, assembling any Collecting the maximum amount of information needed for collection calls, and overdue funds from customers, which tracking down any information requested by include collection techniques, legal claims, customers. This is useful for learning about and selective use of outside collection company systems and where to locate services. information. - Key elements of this position Stratify collection activities to maximize  EASY CUSTOMERS - new hires can be cash receipts assigned to smaller accounts that have fewest Issue dunning letters to overdue problems, after which larger and more difficult accounts accounts are gradually added. Use skip tracing techniques to locate customers Contact customers and  STAFF TRAINING determine reasons for non-payment The credit and collection functions require Issue payment commitment letters the use of skilled labor. Negotiate the return of unpaid Credit department employees must merchandise/loans understand financial analysis and risk Repossession when payment is unlikely mitigation to properly evaluate the risk posed Issue credit hold notifications by the granting of credit to customers. Recommend the accounts be shifted to a Collectors must have a unique set of collection agency organizational and negotiation skills to obtain Process small claims court complaints overdue funds from customers. Recommend bad debt write-offs Therefore, training is required in both areas Maintain accurate records about before employees can be considered interactions with customers effective. Real life case studies or scenarios can be  SKIP TRACER useful to generally deal with credit and - Skip tracers are private investigators collection issues. who locate people who do not necessarily want to be found.  STAFF COMPENSATION - The orientation of this work is toward Should not be oriented excessively toward research into variety of databases, so individual performance. computer skills are paramount. Work Best Approach: Compensate the entire hours can be long, and self-directed. group for its combined performance. - Skip tracers are unique individual, A group compensation plan also means that whose personality is inquisitive and employees are more likely to police each research-oriented, and self-directed. It other’s performance and apply pressure to is quite difficult to find a qualified skip those who are not performing well. tracer, which is why this position is Downside: overly aggressive collection usually outsourced. attitude towards customers.  COURTESY CALLS - a new hire can contact  REPORTS TO OVERSEE THE the larger accounts in advance of payment OPERATIONS OF CREDIT & COLLECTION: due dates to see if there are any issues with  CREDIT LEVELS REPORT - the credit the expected payments. This approach keeps manager wants to know which customers are a menial task away from experienced routinely bumping up against the upper end of collectors, while giving new hires a chance to their allowed credit levels, since this may call interact with customers and learn about their for a credit review. problems.  BAD DEBT REPORT - Both credit managers and collections manager should have access to a report that itemizes bad debts. This report should not just state the raw numbers written off, but also focus on the reasons for the bad debts.  RECEIVABLES AGING REPORT - the most - 1. Receive sales order popular of all collection reports, it lists all - 2. Issue a credit application – if the unpaid invoices that are overdue for payment. customer is a new one  CUSTOMER PROFITABILITY REPORT - - 3. Collect and review credit application these are operational reports to review - 4. Assign credit level income, expenses, and profitability of - 5. Hold order (optional) customers - 6. Obtain credit insurance (optional)  Employee experience expressed in reports - 7. Verify remaining credit (optional) such as employee turnover, time in - 8. Approve sales order position, and training - 9. File credit documentation  RECEIVE SALES ORDER- the order entry CREDIT PROCEDURES, CONTROLS, AND department sends a copy of each sales order RATINGS to the credit department. If the customer is new, the credit manager assigns it to a credit  CREDIT PROCEDURES staff. If existing, it will be given to the credit  CREDIT MANAGEMENT - is an area in which person already assigned to that customer a company ensures that all customer orders being fulfilled on credit are capable of being  ISSUE A CREDIT APPLICATION- if the paid. customer has not done business with the  Credit management requires an order company, send them a credit application form processing flow, where sales orders are and request that it be completed and returned examined for creditworthiness in accordance to the department. with credit rules. 1. Credit Examination (Manual System)  COLLECT AND REVIEW CREDIT 2. Credit Examination (Integrated System) APPLICATION- collect the following  FORMS USED IN CREDIT PROCESS: information, if necessary: Credit report, - SALES ORDER FORM- used to customer financials, and prior transactions. translate a customer order into a standardized format for internal use by  ASSIGN CREDIT LEVEL- based on the the business collected information and the company’s - CREDIT APPLICATION FORM- algorithm for granting credit such as annual designed to require information for the sales volume with customer and third party’s credit staff to render a well-informed credit report. decision regarding the amount of credit (if any) to grant to an applicant  HOLD ORDER (OPTIONAL) - if the sales order from existing customer has unpaid and unresolved invoice, a hold order can be placed until the outstanding invoice has been paid. Staff should always inform the credit manager before placing a hold order.  OBTAIN CREDIT INSURANCE (OPTIONAL) - if the company uses credit insurance, forward the relevant customer information to the insurer to see if it will insure the credit risk.  VERIFY REMAINING CREDIT (OPTIONAL) -  CREDIT EXAMINATION PROCEDURE for existing customers’ sales orders, the credit (MANUAL SYSTEM) staff compares the remaining amount of - In a manual environment, the credit available credit to the amount of sales order department may receive paper copies and approves the order if there is sufficient of sales orders that triggers a manual credit. If not, the credit staff considers a one- review process where the credit staff time increase in the credit level to accept the can block sales orders. order with the review and approval from the credit manager.  APPROVE SALES ORDER- it stamps the  PERIODIC ACTIONS CREDIT CONTROLS sales order as approved, signs the form, and a. Review the automatic credit granting level- forwards to the shipping department for levels of bad debts fulfillment. b. Periodically review credit levels for all customers- change in financial condition  FILE CREDIT DOCUMENTATION- create a c. Periodically review credit granting rules- file for the customer and store all information alteration of credit rules in it that was collected as part of the credit d. Match credit terms to database- update examination process, future reference, credit limit calculation in master file periodic reviews, and change in credit level. e. Periodically conduct training classes- to ensure everyone understand the changes  CREDIT EXAMINATION PROCEDURE f. Audit compliance with credit granting rules- (INTEGRATED SYSTEM) Internal audit review calculations - When the credit department has on- g. Subscribe to a credit score notification line access to a company –wide service- warning of financial collapse integrated computer system, the credit examination process can be  ONGOING CREDIT MONITORING - The streamlined. credit department must initiate an ongoing - 1. Receive sales order process of monitoring to ensure that the - 2. Issue a credit application correct terms and limits continue to be applied - 3. Collect and review credit application to customer. Monitoring involves compilation - 4. Assign credit level of baseline set of credit documentation: - 5. Hold order (optional) 6. Obtain credit a. CREDIT APPLICATION- details the legal insurance (optional) form of the customer, ownership, financial - 7. Verify remaining credit (optional) condition, trade references, and other - 8. Approve sales order information. - 9. File credit documentation b. TRADE REFERENCES- the names of at least three trade references  ALTERNATIVE CREDIT CONTROL c. PERSONAL GUARANTEES- “guarantors” SYSTEMS d. NOTES PAYABLE- document of a long- - The controls for two systems are term payment plan largely the same, except for the e. CREDIT REPORTS- useful for developing subsequent handling of sales orders a trend line information for each customer once they are approved. f. BALANCE SHEET- document of financial - In manual system, the credit staff condition of a specific date stamps two copies of S.Os; files one g. INCOME STATEMENT- document of copy and sends the other copy to the financial performance over a specific period shipping department. h. STATEMENT OF CASH FLOWS- - In computerized system, the credit staff describes the type of cash inflows and no longer places an approval stamp. outflows Instead, it flags the S.Os in the i. DEBTOR ADMISSIONS- documents of computer system as having been admissions by the debtor that they owe approved. money.  FRAUD RELATED CREDIT CONTROLS - There is a strong incentive for someone to  INDICATORS OF FUTURE PAYMENT fraudulently move a sales order around the DELINQUENCY credit department, or to falsify a credit limit, a. Bankruptcy since doing so presents the opportunity to b. Change from proprietorship deliver goods to a customer who has no c. Credit report results intention of paying. Controls that can prevent d. Days to pay are: e. Decline in financial indicators a. Separation of duties f. Failed payment promises b. Password-protect the credit management g. Missing credit application system h. Order decline c. Lock up the credit approval stamp i. Ownership changes- habits of new owner j. Triggering events  CUSTOMER CREDIT RATINGS  FIVE CS OF CREDIT - Credit ratings are used to standardized the The qualitative approach measurement of a customer’s ability to pay 1. CHARACTER- Refers to the willingness to pay in timely manner, evidenced by payment - INTERNAL CREDIT RATINGS history. Understanding the character requires Credit rating system will only be useful if a one to delve into the backgrounds of people company has thousand customers, since who owns or manage the business. statistical analysis yields better results across large populations. An internal credit rating system should be 2. CAPACITY- refers to its ability to pay back based on any factors a company finds to be a loan or credit advance. A high level of important in determining the credit quality of capacity is evidenced by a history of strong customers. Below are reliable indicators of positive cash flow and a reasonable ratio of creditworthiness: liabilities to cash flow. - Bankruptcy- no recent bankruptcy 3. CAPITAL- the net worth of the filing customer/business. - Legal Proceedings- there should be 4. CONDITIONS- the environment within no tax liens which the customer operates. For instance, - Liquidity- assets exceed liabilities economic environment, regulations, and - Payment history- track record of catastrophic events reliability paying on time 5. COLLATERAL- the ability of the customer - Profitability- achieving profit over the to make a secondary source of repayment past few years available to the company - Stability- the longer the customer has been in business, the better. SUMMARY - Third party credit score- CS result is Credit examination process is considered an a reliable payer to all its suppliers. annoyance that interferes with the timely shipping of products to customers. Paying proper attention to streamlining the credit examination procedure will possibly reduce the perceived annoyance level. Credit department is, in effect, one very large control, since its entire purpose is to mitigate the risk of not being paid by customers.  COLLECTION PROCEDURES, CONTROLS, AND TACTICS  CREDIT MEMO A credit memo is a contraction of the term "credit memorandum“ a document issued by the seller of goods or services to the buyer, reducing the amount that the buyer owes to the seller under the terms of an earlier invoice. A credit memo may be issued because the buyer returned goods to the seller, or there is a pricing dispute, or a marketing allowance, or other reasons under which the buyer will not  THE COLLECTION PROCEDURES pay the seller the full amount of the invoice. 1. ASSIGN OVERDUE INVOICES The seller records the credit memo as a (OPTIONAL) - In a well-run collections reduction of its accounts receivable balance, department, all customers are assigned to while the buyer records it as a reduction in its a collection staff. Doing so allows the accounts payable balance. collections staff to build familiarity with certain customers. 2. ISSUE DUNNING LETTERS- a notification sent to a customer, stating that it is overdue in paying an account receivable to the sender. It states the amount due, the date of the unpaid invoice, the number of the invoice, and any late payment fines or interest penalties. 3. INITIATE DIRECT CONTACT - discuss with customers the reasons for lack of payment and do proper documentation (details, date, person, reasons). 4. SETTLE PAYMENT ARRANGEMENTS (OPTIONAL) - accept a longer payment period, document the terms of the payments to be made, as well as any interest to be paid. 5. ADJUST CREDIT LIMIT (OPTIONAL) - collection staff should have information about client’s financial condition to recommend to the credit staff if a reduction or termination of customer’s credit is in order. 6. MONITOR PAYMENTS UNDER SETTLEMENT ARRANGEMENTS (OPTIONAL) - required to keep customers from delaying payments. 7. REFER TO COLLECTION AGENCY- at this point, the customer should certainly be placed on a credit hold list.  8. SUE THE CUSTOMER (OPTIONAL) - if  COLLECTION TACTICS all alternatives have failed, meet with the 1. PAY UNDISPUTED LINE ITEMS - For company’s legal staff. Also, the customer customers who are using disputed invoice should have sufficient assets to pay any line items to delay payment judgement from the case. 2. CONFIRM PAYMENT DATE - For customers who have committed to pay as 9. WRITE OFF REMAINING BALANCE - of a certain date when debts are written off, they are 3. IN-PERSON CHECK PICKUP - When it is removed as assets from the balance sheet possible to route a person to the customer because the company does not expect to to collect a payment recover payment. 4. TAKE BACK MERCHANDISE - For sales of goods where customers cannot pay 10. CONDUCT POSTMORTEM - if there was 5. HOLD ORDERS - When there are orders a specific problem with the company’s from a customer that have not yet shipped systems that caused a bad debt to occur, 6. AUTOMATED CLEARING HOUSE call a meeting of those people most DEBITS - For customers with little cash on closely related to the problem to discuss hand solutions. 7. SPLIT PAYMENTS - For customers able to pay in small increments  COLLECTION CONTROLS 8. POSTDATED CHECKS - For customers - There needs to be a strong control system in able to pay as of a specific future dates place for monitoring the activities of the 9. INTEREST AND PENALTIES - For collections staff. customers who deliberately delay 1. USE ACCOUNT ASSIGNMENT payment GUIDELINES - collections manager can 10. PROMISSORY NOTE - For customers use guidelines to assign certain accounts without sufficient cash to pay in the short to experienced staff especially difficult to term handle customers. 11. SALESPERSON ASSISTANCE - When a 2. MANDATE A COLLECTIONS salesperson is assigned to the customer PROCEDURE - there should be a 12. COD ROLL - For customers with unpaid standard set of activities that collection balances who now pay on COD terms staff is required to pursue when contacting 13. BARTER - For customers who are customers about collection issues. completely unable to pay by other means 3. REQUIRE COLLECTIONS RECORD 14. ARBITRATION - When customers may KEEPING - maintain adequate records have legitimate claims relating to a sale when contacts and promises were made, 15. ATTORNEY LETTERS - For somewhat and next action dates to determine the larger invoices, where dunning letters status of overdue accounts receivable. have not triggered payment 4. REVIEW COLLECTION ACTIONS 16. FINAL DEMAND LETTER - When all TAKEN - collections manager should hold other normal collection efforts have been regular meetings to learn the collection attempted actions to be taken, as well as expected 17. SMALL CLAIMS COURT COMPLAINT - payments. Also, evaluate if there are When on the verge of filing a lawsuit. lapses in collections 5. REQUIRE SUPERVISORY APPROVAL OF ACTIONS TAKEN - especially if the collection staff wants to allow delayed or reduced payments. 6. MONITOR CREDIT LEVELS - give collections staff input into the termination or reduction of customer credit during and after collection activities.