A company will need to start departmentalizing when it begins to grow or has grown. A credit department is one of the first departments which will become needed as revenue grows and credit is extended to clients new and old. The types of transactions specific to your company will determine how rigorous your company needs to be in the development of its credit department.
Why Does a Company Need a Credit Department?
Many start-ups and small to medium businesses do not “need” a credit department. In these cases credit management tasks are usually assigned to one person within the business, generally the CFO or Controller. Their job is to keep the accounts receivables low. As the business starts to grown and revenue increases, the job of collections and credit management will (hopefully) become too much for one person to handle efficiently.
When this occurs, a company needs to create a credit department. Credit departments work in conjunction with the sales department to make sure that the sales extended on credit are going to credit worthy customers who will pay in a timely manner. Often times friction is created between these two departments – sales want the sale no matter what, and credit departments are tasked with only allowing sales that will end up being paid. A good CFO or Controller will have these departments work together harmoniously.
Goals Of a Credit Department
There are a few important goals that every credit department should have within a company structure. The obvious few are the reduction of bad debt and the increase of timely payments by new and current customers. Bad debt plagues all companies from large to small.
There are a number of steps that the credit department need to implement with the sales staff to reduce the occurrence of bad debt. Securing a personal guarantee or letters of credit, and sending or filing preliminary notices and liens are just a few tools that construction industry business can use to mitigate the chance for bad debt.
Other goals of the credit department include stream-lined payment and billing processes making it easier for clients to pay and pay timely. This can be helped by automating client reminders to pay when a debt is past due.
Relationship Of Credit Department And Credit Policy
There is a natural relationship between the credit department and the company’s credit policy. While many times the credit policy is implemented before the credit department is established, the credit department is tasked with making sure those procedures are complied with. When the credit department is established, then the credit policy may need to be revised to fill the bigger and expanding role of credit in the organization.
For example, the credit department will likely be where the sales contract, personal guarantee, and other initiating documents for new clients are located. It’s also the department that will institute the collections process when the debt is going bad.
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