As our company transitions from a small business to a larger, medium-sized enterprise, we face new challenges and opportunities that require a more defined and strategic approach to credit management. Implementing a sound credit policy has become crucial, especially in the Architectural and Engineering industry, where credit applications and effective credit management are not the norm. Recent insights gained from NACM’s Credit Congress have been invaluable in helping me shape our strategy for developing a more effective credit policy.
Why a Defined Credit Policy is Essential
In our earlier days, we managed credit with a more informal approach, which suited our smaller scale of operations. However, as we have grown, the complexity of our business and the need for practical credit management has increased. A well-defined credit policy is now essential for:
- Mitigating Financial Risk: A structured credit policy helps us evaluate the creditworthiness of potential clients and the financial backing of the projects they bring, reducing the risk of bad debts and ensuring that our financial resources are utilized effectively.
- Ensuring Consistency: With a larger engineering team and more complex operations, having clear guidelines ensures that all decisions regarding new project onboarding, credit limits, terms, and disputes are handled uniformly, reducing the risk of errors and discrepancies.
- Improving Efficiency: A comprehensive credit policy streamlines our project onboarding and credit processes, from setting limits to managing collections, allowing us to focus on specific portfolios based on risk opposed to managing everything the same.
Insights from NACM’s Credit Congress
Attending NACM’s Credit Congress is critical because it always provides the needed catalyst for me to focus my thoughts on new and innovative approaches to credit management. This year, the conference provided valuable information and perspectives that have been instrumental in beginning to develop our new and ‘practical’ credit policy. For my added benefit, there were three specific sessions that discussed the creation of credit policies: Building Credit Policies – Small, Medium, Large Departments Unite; Credit Policy Bootcamp – Creating a Credit Policy from Scratch part 1; and Credit Policy Bootcamp part 2. Key takeaways included:
- Industry Best Practices: The conference offered insights into industry best practices for credit management, which helped us understand the importance of establishing clear credit terms and risk assessment protocols tailored to my business. I was able to identify in my mind what the ‘critical information’ components are in onboarding a new project.
- Benchmarking and Trends: Networking with peers and credit experts allowed me to benchmark my business’ practices against leading companies and identify emerging trends in credit management. This information has been crucial in refining my approach and ensuring we stay competitive in our markets.
- Practical Tools and Strategies: I learned about practical tools and strategies for assessing credit risk, managing collections, and handling billing disputes. My thoughts focused on how I might be able to utilize these tools will enhance my ability to manage credit more effectively and reduce potential financial exposure.
Key Elements of Our Evolving Credit Policy
As we scale, our credit policy must address several critical areas to meet the needs of a growing organization (not necessarily in this order):
- Credit Limits: Establish clear maximum credit amounts based on detailed risk assessments to ensure we’re not overexposed to any single client or project.
- Credit Terms: Define specific terms, including payment due dates and penalties for late payments, to manage cash flow effectively and set expectations with clients.
- Write-offs: Create guidelines for writing off bad debts, including thresholds and approval processes, to handle non-performing accounts efficiently.
- Billing Disputes: Implement clear procedures for managing and resolving billing disputes, ensuring that any issues are addressed promptly and fairly.
- Customer Refunds: Outline the process for issuing refunds and credits, maintaining transparency and consistency in how we handle these situations.
- Credit Holds: Set criteria for placing holds on accounts that are overdue or in violation of credit terms, helping us mitigate potential losses.
- Finance Charges: Specify policies for imposing finance charges on overdue accounts to encourage timely payments and compensate for extended credit periods.
- Payment Plans: Define conditions under which we offer installment payment plans, providing flexibility to clients while managing our own financial risk.
Understanding the Triggers for Policy Changes
As our business grows, several factors may necessitate adjustments to our credit policy. Key triggers include:
- Economic Shifts: Events such as economic downturns or industry-specific changes may impact client payment behaviors, requiring policy updates to address increased risks.
- Operational Changes: Changes in our team size or structure, new technologies, or evolving business processes may necessitate policy revisions to align with new operational realities.
- Client and Project Risks: Identifying and managing risky projects or clients sooner can prevent financial strain. We must be prepared to adapt our policy based on new insights or emerging risks.
- Leadership Changes: Adjustments in our C-suite or sales management can influence our credit strategy, necessitating updates to align with new strategic directions.
- Mergers and Acquisitions: If we explore mergers or acquisitions, integrating new entities into our credit management framework will require a thorough review and possible revision of our policy.
Making the Case to the C-Suite
To successfully incorporate a robust credit policy within our industry, it is essential to communicate its value to the C-suite effectively. Here’s how we can demonstrate the importance of a structured credit approach:
- Highlight Risk Management: Emphasize how a clear credit policy helps identify and mitigate risks earlier, reducing the likelihood of financial losses from problematic projects or clients.
- Show Efficiency Gains: Present how a well-defined policy streamlines processes, improves consistency, and frees up resources, enabling us to focus more on strategic initiatives and less on reactive problem-solving.
- Provide Industry Examples: Share case studies or industry benchmarks that illustrate the benefits of a strong credit policy in similar contexts, reinforcing the need for a formalized approach.
Conclusion
As we evolve from a small to a medium-sized business, adopting a comprehensive credit policy is vital for our continued success. Insights from NACM’s Credit Congress have been instrumental in shaping my approach, providing me with valuable tools and strategies to enhance our credit management practices. By helping me gather my thoughts to innovate clear guidelines and addressing key areas such as new project onboarding, credit limits, terms, and risk management, I’m in a better position to manage the growth more effectively and maintain financial stability.
Incorporating these changes will not only enhance our operational efficiency but also align our practices with industry standards, allowing us to navigate the complexities of the Architectural and Engineering industry with greater confidence. Engaging the support of our C-suite in recognizing the importance of a structured credit policy will be instrumental in achieving these goals and driving our company forward.
by Erik Wright, CBF, Spectrum Engineers