Section I: Goals and Responsibilities
Step 1 - Mission Statement of the Credit Function
Definition

The mission statement is the statement of purpose. What is your department trying to accomplish? The mission is not a statement of your goals. Your goals are put into place to support the mission. The mission statement describes in what ways you are supporting or interacting in the overall company's mission. It defines your role in the unified vision.
Illustration

A Company with high margins and an aggressive sales growth target may have a mission statement like this: The mission of the Gorman Inc. credit department is to facilitate an annualized 20% growth in top line performance by assisting in the sales process. The credit department's role is to develop strong customer relationships by granting aggressive but appropriate credit limits and terms, easing the establishment of new accounts by processing applications quickly while protecting the margins by managing risk of loss represented by fraud, failure or severe delinquency
Developing a Mission Statement

Before a mission statement can be adequately defined, a general understanding of the environment or market in which your company operates must be obtained. In developing the mission statement, there needs to be a basic understanding of the following: A) B) C) D) E) F) Nature of the Marketplace Competition Location of your Customers Growth Plans Margins Internal Company Structure

Exploring these areas will ensure that your credit department's mission statement is directly in line with the marketplace and your company's overall mission statement.

Step 2 - Goals of the Credit Department
Definition

Now that you have identified the key components of your mission statement, you can set your specific goals. Your goals are put into place to support the mission statement. In order to be effective your goals must be:
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Understandable Measurable Realistic Re enforceable Be tracked for quick feedback

Illustration The mission statement in Step 1 could be supported by the following goals. Goal 1: DSO less than 45 days. Goal 2: Less than 2% Past Due 90 Days Goal 3: Approve or Decline 90% of Application within 24 hours. Setting Goals This is where you take your mission statement, which is more strategic in nature, and turn it into a tactical plan. Setting appropriate goals is the most critical part of a credit policy. The entire credit policy, credit department processes, and evaluation systems for the department will be built to ensure achievement of these goals. If your goals are set incorrectly, achievement of them will simply ensure you end up in the wrong place. Now is the time to roll up your sleeves, reach for your calculator and crunch some numbers.

Step 3 - Organizational Responsibility
Definition

Organizational responsibility is a distinctive way of saying, who is responsible for the major actions in the department and what authority levels currently exist for approvals and credit limits. Illustration Below are some common areas in which organizational responsibilities need to be defined. Credit Limit Approval Example Credit Assistant Up to $5,000 Assistant Credit Manager Up to $50,000 Credit Manager Up to $200,000 Director of Credit Up to $1,000,000 VP of Finance Over $1,000,000 Declines The Credit Manager must approve all declined credit applications. A letter of denial from the Credit Manager will be sent to the applicant with a copy forwarded to the sales representative.

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Alternative Terms Cash In Advance • • Letter of Credit • Progress Payments
Setting Organizational Responsibility

This sounds like a simple and straightforward step in developing a credit policy; however, it is not without its traps. Trap number one is over engineering. Many companies set up elaborate approval authorities which end up adding many steps to the approval process. These steps cost time, money, and can dramatically increase turnaround time. The exact opposite of what you are trying to accomplish. Trap number two is not assigning any staggered approval authority and having the Credit Manager approve all orders. Except in the smallest of credit departments this can lead to backlogs, which leads to slow turnaround or applications being pushed through without adequate research. Bottom line --it is all about balance and resource allocation. Let low exposure, low risk approvals happen quickly without being passed to the credit manager for approval. Have high exposure, high risk approvals passed to higher levels for approval.

Section II: Managing the Customer Relationship

Step 4 - Credit Evaluation
Definition

Now that we have finished the foundation of our credit policy it is time to get into the nuts and bolts. Steps 4 through 6 focus on how you approach your credit approval process. You start with a high level view of how you plan to evaluate credit. When you get to this step resist the temptation to define a step by step process. At this point we are defining policy and parameters.
Illustration

Here are a few of the parameters, which can be defined with regards to credit evaluation. • • • • A credit investigation will be conducted on all new applications. A complete and signed credit application is required. Credit data will be obtained from an outside source on any request over $5,000. Any branch requesting credit based on headquarters must be confirmed verbally with it's headquarters, with location and purchasing limits confirmed.
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All new requests under $1,000 are approved for COD. Any request over $100,000 will be faxed directly to the Director of Credit for immediate evaluation.

Credit Evaluation

Probably the most important points to consider when reviewing your credit evaluation is that not all applications are created equal. Efforts should be scaled based upon risk and exposure. The more risk and exposure the more due diligence needs to be done. The old 80-20 rule truly applies to credit evaluation. 80% of your department’s resources should be targeted towards 20% of new applicants. However, this is exactly where credit mangers earn their paychecks... which 20%? Common patterns we often see is that Credit Applications that fall outside of the norm end up consuming a great deal of our time and resources. For example, A low dollar order comes in from a small business. Since the order amount is so low, outside credit information is not checked. At this point the application is sent to trade calling where it sits for five days while a clerk makes four calls and sends three faxes. At this point, this small request application has cost quite a bit in both time and money ($X in calls, 5 days). Sound Familiar! A good credit evaluation policy will direct valuable resources to where they are needed most and only use resources, which will effect the final decision.

Step 5- Credit Limits
Definition

Now it is time to review the factors that must be considered when setting and managing credit limits.
Illustration

Here is an illustration of a credit limit policy using D&B data elements.
If CreditScore and Net Worth and Employees Limit Then Credit

> 74 25 - 75 74 25 - 75 74 25-75 74 50-75 25-50