Goals of Credit and Collections
Departmental goals try to align the activities and the objectives of each department to the goals of the organization. This alignment is critical to the success of every organization. The typical credit department is responsible for monitoring, protecting and managing the company's investment in Accounts Receivable. A typical credit department is responsible for each of the tasks or goals listed below:
- To communicate the condition, cost and trend of the company's investment in receivables to management,
- To convert accounts receivable to cash as quickly as possible,
- To reduce delinquencies,
- To limit bad debt losses,
- To address the root causes of customer deductions,
- Resolve deductions in a timely manner,
- Work effectively with sales and other departments to maximize sales while limiting delinquencies and bad debt losses,
- Use the resources available to the credit department to help sales to pre qualify companies identified as potential new accounts,
- Look for ways to make sales on open account terms safely, not for excuses to hold orders or reject new credit applicants,
- Cross train the credit department team,
- Reduce turn-around time on every function handled by the credit department,
- Take steps to improve cooperation between sales and credit,
- Maintain and increase goodwill with customers whenever possible,
- Develop the skills of credit department personnel through appropriate supervision,
- Educate other departments about credit and the credit function,
- Control operating costs and expenses within the credit department,
- To avoid conflicts of interest when possible,
- To ensure that any and all conflicts of interest are disclosed by members of the credit department,
- Reduce payment delinquencies and bad debt losses.
The goals of the credit department can often conflict with its customers' goals. For example, as banks tighten their credit granting policies, some customers want, need and expect trade creditors to act as a source of interest-free, short-term loans. For trade creditors, this results in an increase in DSO resulting from payment delays by debtors. If unchallenged and unchecked, serious payment delinquency can be the result, adversely affect the creditor company's cash flow. Therefore, the credit department's role and its goal involve ensuring that accounts receivable are converted into cash quickly once customers’ invoices become due. If appropriate action is not taken, customers’ slow payments can cause serious financial problems for the creditor company.
Note: A conflict of interest may arise in any number of ways. For example, if an employee of the credit and collection function has a direct or an indirect financial interest in a customer, there is a potential conflict of interest. If the department employee or a family member has an ownership interest in a customer, that would be another conflict of interest. A conflict could also arise if a former employee of the company is now requesting open account terms in order to purchase from the creditor company. One final thought: Individual goals are more than simply what is measured for the annual performance review. Goals play an important role in helping every member of the credit and collection team to grow, change, and contribute to the success of the company. Goals can provide individuals with the motivation needed to close the gap between their current performance and where they want/ need to be.
Edited by Michael C. Dennis. Michael is a consultant with 10 years of experience helping companies to establish appropriate goals for credit departments and team members.