We learned in Principles of Business Credit that business to business credit has been a part of the U.S. business scene for hundreds of years. With business credit playing such a huge part within the business scene and the understanding that doing business on credit terms has a much higher rate of risk and cost of doing business, you must protect yourselves by having a company credit policy and procedures in place.

The cornerstone of your credit accounts is the credit application. Within the credit application you must have clear and concise terms. This then becomes your legally binding contract. The question then becomes what happens to the credit application after the customer has been granted open terms and orders and services are rendered. At a lot of companies, all supporting documents and the credit application go into a folder with the customer name and information on it and is filed into a cabinet in the credit managers office, in some cases never to see the light of day again. This is where the need for written credit policy and procedures is a must. Someone in the credit department should be auditing these files and applications based on a predetermined set amount of time. Your company may want to audit every six months, annually, or longer. The amount of time you spend doing audits may vary based on the type of markets you are in, the number of customers on open charge terms, and the number of employees a company can afford to complete such projects. Companies that deal with food for example have a huge risk due to the life cycle of the product. It may only be good for days not years. In my industry we sell automotive parts to independent repair shops, who then resell the product to the consumer, there is nothing to take back in the event they become insolvent.

Audits will not prevent all credit horror stories but will prevent some of the main ones. Here is a real-life example from my first job in credit. I had been working with the credit manager at my employer for a few years but was mainly in the sales side of the business and only played a small role in the credit department. Sales and credit never spent much time discussing names of who was placing orders and more importantly who was not. This is the first big mistake! Your sales department should be feeding the credit department information in real time, they are your best detectives. About a month into my new job I started taking an active look at what information we had on each customer. The previous credit manager had done a fantastic job of record keeping of all of the original documents and applications. Some were dating back to the mid-80's. My mind started to think that if the applications were that old, who were the principles and owners listed on these accounts, also did we have open accounts for customers that we knew had gone out of business.

This started a two month process to audit the files.

The first wave was to go through each application and find every customer that had closed their shop and gone out of business. The second mistake was keeping open accounts for businesses that were closed. After weeding out all of the applications for closed accounts I started to work on the process of verifying with businesses that had applications older than 15 years to see if the people that signed the application were still involved with the business; in most cases they were not. Family members had taken over the business, partners had left or died, or the business was sold out right and no one notified us. Mistake number three, not watching who is running the business. Talking to your sales force, checking state web sites, or just cold calling and visiting with your customers can help to prevent this. Do not assume that customers will notify you when change happens. You may find that as we did that you are allowing customers to buy on open account who have never filled out an application. In court this will not hold up and you will end up writing off bad debt if that company goes under. Keeping records clean and organized will always serve you well when documents are needed.

Correcting just these three mistakes that we were making and creating a process where we review sections of accounts monthly ensured that the process took just a few days instead of months. It also allows us the ability to get to know our customers better, keep a better handle on accounts receivable and most important, reduce risk.