Questions Every Business Owner Should Ask Themselves When Determining Their Company’s Credit Policies
Consider the following questions as you develop your credit policies.
Extending credit to customers is a common business practice. Not only does it align your company with the competition, it also keeps you in line with industry standards. But for business owners to determine whether extending credit is a feasible option for their company, they need to have credit policies in place. So how do you go about developing these policies if you haven’t already? Below, we outline 10 questions you should ask yourself when determining your company’s credit policies, from small-business expert Frances McGuckin’s book Taking Your Business to the Next Level: An Essential Step-by-Step Success Plan for Small Business.1
1. What can the company afford?
Having a grasp on your company’s financial standing is key to making any decision that can potentially cost you money. Be sure to go through your accounts and finances with a fine-tooth comb to determine what you can afford.
2. Are there any slow-paying customers you’re presently dealing with?
It’s important to be aware of customer behavior, especially when it comes to payment. Make a list of any customers who are consistently slow to submit payment and keep it top of mind when you are creating your potential credit policies in the future.
3. Is your current collection process going smoothly?
Evaluate your current process for collection. If it’s going well, determine why; if it’s going poorly, determine why. Insight into current operations will help prepare you going forward as you update existing processes and establish new ones.
4. Are your other business processes and methods successful?
Before you add more to your plate, you need to make sure your current business practices and processes are successful. Your company shouldn’t be working to extend credit if things aren’t already running smoothly.
5. What, if anything, can be improved about your company?
One of the best things you can do as you start developing your credit policies is to identify any areas for improvement. Even if your company is running efficiently and successfully, you’ll most likely find something that could be enhanced. It’s in your best interest that your company be in tip-top shape before extending credit.
6. What is the most credit you can afford to extend per customer?
Have an idea of the total amount of credit you are capable of extending to a single customer. This is one of the most important guidelines you can establish, and the amount should be determined after an extensive review of your company’s financial status.
7. How is your cash flow situation currently?
It’s important to understand the current state of your company’s finances, including its cash flow situation. Make sure to review your net amount of cash and cash equivalents, both incoming and outgoing, as you determine your credit policies.
8. Who will be responsible for placing collection calls?
Extending credit opens new roles and responsibilities for your company. One of these tasks includes placing collection calls, a tedious but important action that must be taken. Determine who will make these calls and what the process should look like.
9. Do you understand the small claims process?
This is an important process to understand so that you and your company can stay protected. Small claims courts allow you to file and defend a case on your own, without the incurred expense of a lawyer. Someone on your team should have a solid understanding of this process, as extending credit can sometimes lead to unpaid accounts that need legal intervention.
10. Will overdue accounts be charged interest?
Determine how you will handle overdue accounts. Will you charge a late payment fee? What about charging interest on a late payment? This is important to know ahead of time so that you can communicate this policy to your customers and potentially deter overdue accounts.
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1Source: McGuckin, Frances. Taking Your Business to the Next Level: An Essential Step-by-Step Success Plan for Small Business. Naperville: Sourcebooks, Inc. 2005.
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