|CREDIT POLICY - HOW TO WRITE ONE.||
Managing Credit: Is your Credit Policy Profitable?
To demonstrate the importance of credit, according to Industry Canada sources the Small Business Loans Act (SBLA), a program that serves start-up and smaller firms, has succeeded in lending more than $ 20 Billion to over 50,000 Small and Medium sized Enterprises (SMEs) in Canada, since its inception in 1961. The loans have helped in creating approximately four new jobs per loan. Today SMEs have become an integral part of the Canadian economy. Firms with fewer than 50 employees each were responsible for 81% of the new jobs in Canada in 1996-1997.
in production, distribution, selling, consumption and expansion. It helps
smoothen the rough curve of seasonality of a seasonal business. It increases
the immediate buying power of a consumer. But where there is good there
may also be bad and ugly. Credit could mean a collapse due to Overbuying,
Overexpansion or Overselling.
It just goes
to corroborate the fact that no matter how big or small is the size of
business operation, companies are focussing increasingly on managing and
collecting their receivables efficiently and effectively, thus maximizing
their cash inflows.
Writing an effective Credit Policy begins with an understanding of the financial exposure that you or your business can endure and the amount of your working capital that you would be willing to risk, or call it 'invest' in your customers.
Revolutionary developments in the computer and communications fields have forced companies to increase speed and become relevant. Markets are becoming global and economic activity across nations is becoming increasingly integrated. Competition can come from the face of a computer screen with the competitor sitting in a different time zone. About the only thing in business that is a constant, is change. As the world transforms at an unprecedented pace so have to the components that propel its engines. Thus a credit policy that is written without an understanding of the market and ample room for change in it and the one that is not frequently revisited could become obsolete in matter of days. With the information-age revolution, knowledge-based activities are becoming increasingly important for existence. Hence, enhancing skill-sets and knowledge is an intangible component of a credit policy.
I am of the firm belief that 'what gets measured gets managed'. Therefore as a matter of policy one should manage by measuring results. Every time a deal goes bad, review the things that were done incorrectly in either setting up of the account, monitoring or collecting it. Measure Days Sales Outstanding (DSO), aging receivables, and bad debts as a percentage of sales. Keep a tab on your liquidity by reviewing liquidity ratios like the current or working capital ratio. Also keep a pulse on your inventory turnover. This will tell you if your efficiency is increasing, decreasing or the same over different time periods. Profits are a combined function of liquidity and efficiency. You can use the same logic when assessing your customer.
Using quality information can help scores in managing risk. Collecting relevant information requires a well thought-out Credit Application. It should seek permission from your customers to conduct credit investigation from credit bureaus, trade and bank references for the purpose of granting credit. A Credit Application is a document that not only collects information but is also an 'Application for a Loan ' that the applicant fills. Make sure that your Credit Application reflects the sentiments that you are serious about the amount that you will be extending in the form of cash or kind.
As a guideline you can write your policy in the following sections. The contents of each section can be written to best fit the nature of your franchise:
1. The set-up
of credit function.
Entering the marketplace by investing in a franchise can be one of the best ways that an entrepreneur can launch a successful business. Franchising in Canada continues to grow at a significant rate. Franchise sales in Canada in 1987 were estimated at $61 billion; and now it is close to 90 billion. The retail trade alone represents almost two-thirds of that number. It is expected that sales will increase 10 to 15 percent annually over the next few years. The person who operates a franchise gets the better of both the worlds - the satisfaction of operating an independent business, combined with the leverage of working for a large organization.
Ultimately, Credit Management is an art and not a science. It is definitely an 'indefinite'. It gets its design from a variety of inputs like the creativity, experience philosophies and attitudes of the individuals administering it. Sometimes a decision based on your 'gut' feeling against all odds could prove to be the best one. But as a credit adage goes "get the calculations right in a calculated risk" and remember that 'A sale is not complete till the money is collected.' Good luck with your franchise.
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Source: The above article appeared in the "Canadian Business Franchise Directory 2000". The directory is a complete guide to franchising in Canada and is available at major book sellers. Email:firstname.lastname@example.org
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