CHAPTER 2

Credit and
Collection
Operations
 Part 1:
Learning 1. Note the roles of the various

Objectives
employees of the credit and
collection functions.

Part 2:
2 Describe special characteristics
and abilities to look for when
selecting personnel.

Part 3:
3 Learn how to build a strong
credit team
 INTRODUCTION
Credit and collection activities involve granting credit to
customers to defer payments to the seller, and
collecting funds at a later date. While it's ideal to collect
payments in advance or on delivery, competitive
pressures often prevent this. Businesses must decide
on methods to collect funds if they refuse to grant
credit.
 OVERVIEW
In this section, we describe the problems faced by the
credit and collection functions, as well as how these
areas can be organized. Both functions impact the
performance of other parts of a company, which can
result in some political maneuvering to see who
controls them
Credit Conundrum
The credit department is unpopular
due to customers seeking unlimited
credit to delay cash payments, while
the manager must exercise prudence
in granting credit only for invoices
likely to be paid.

The result is 2 Types risk

1. The risk of granting too much credit
to a customer that cannot pay.
2. The risk of denying credit to a
customer who can pay.
 Credit Conundrum
Navigating between credit management risks and
granting the right amount can be challenging. Sales
departments perceive the credit manager as stifling
sales, while the chief financial officer believes
excessive credit leads to significant bad debt losses.

Credit staff may struggle to explain reasons for

decisions to the sales department due to confidential
information. This can lead to frustration and
potentially result in the credit manager losing
power. To avoid this, senior management should
support the credit department's key role, as they
understand its importance.
Organizing Credit and Collection Department
The credit and collection department's structure and staffing are influenced by
a business's size and nature. During changing business conditions, the
department remains relatively constant, providing support for full-volume sales
and increasing delinquencies. However, in a depressed economy, collection
problems may increase due to rising inflation and tighter money supply. During
prosperous times, new account volumes create more upfront work for the credit
department.

The department's organization is crucial for its functionality and stability. A

balance between newly trained staff and experienced professionals is desirable.
Cross-training personnel can provide flexibility, while accounting department
personnel can perform routine tasks and outsource tasks to companies
specializing in credit-related functions. Ultimately, the organization should be
stable and adaptable to various conditions.
Organizational Structure
Credit and collection functions can be
separated within departments, with the
credit function issuing short-term
loans and reporting to the treasurer or
chief financial officer. The collections
function, an extension of billing,
reports to the controller. This
organization can prolong customer
resolution time. To prevent this, it is
recommended to combine the two
functions into a single department.
CENTRALIZATION VS. DECENTRALIZATION
Although there may be variations among
companies, the control and administration
functions can usually be classified into two
types of operations: centralization and
decentralization.

Companies with diverse operating units face

the decision to centralize or decentralize their
credit function. Centralized structures control
and administer the function from a central
location, while decentralized structures report
to principal locations with remote personnel.
 CENTRALIZED—CREDIT CONTROLLED AND
ADMINISTERED AT A HEADQUARTERS OFFICE

A centralized department handles credit

operations at a company's headquarters, with
credit managers and staff responsible for
approving terms on most orders. Credit
professionals may face questions from sales
staff or upper management. Automated
options are increasingly used to approve credit
lines for low-risk customers or low-amount
requests, allowing credit managers and staff to
focus on important customers and situations.
DECENTRALIZED—CREDIT CONTROLLED AT HEADQUARTERS
BUT ADMINISTERED FROM DECENTRALIZED LOCATION(S)

A mid-management level credit manager reports to an executive-level credit manager at headquarters and
division head, while executive-level authority in credit and collection is provided. Middle management
establishes procedures for credit professionals to follow.
 AUTHORITY
MID-LEVEL CREDIT MANAGER TOP-LEVEL CREDIT EXECUTIVE

The mid-level credit manager, The top-level credit executive sets

typically appointed by the division credit policy for divisions, considers
general manager, handles approvals beyond mid-level limits, and
personnel issues, operating is responsible for all headquarters
expenses, and nonfunctional accounts. They collaborate with
matters within local policy. They can
accounting and systems departments
provide final credit approval on
to determine procedures, techniques,
orders under a stipulated amount.
and practices for credit and collections
operations.
 AUTHORITY

DECENTRALIZED
Top-level credit executive
collects information,
prepares reports, advises
field executives, and
participates in problem-risk
analysis in this organization.
 Benefits of Centralization
Economies of Scale Consistency and Control
Centralized credit offices reduce operating costs, increase A centralized environment simplifies adherence to policies,
efficiency, and provide better customer service by serving procedures, and protocols, ensuring consistent credit
common customers decisions across business units and minimizing satellite
department influence.

Benefits of Decentralization
Internal and External Involvement in Setting
Relationships Strategic Priorities.
Close proximity to customers can improve credit professionals'
Credit can integrate its objectives with those of sales and
relationships with marginal customers and those with significant
marketing into divisional goals. Also, decisions made at a
dollar exposure. This fosters better understanding of business
local level can be implemented immediately without going
goals, market and customer needs exchange, and enhances
through additional levels of review.
communication among departments, reducing interdepartmental
conflicts.
The Credit Credit and collection areas involve
and managers and specialized clerical
staff. Job descriptions include credit

Collections manager, credit clerk, collections

manager, collector, and skip tracer. A

Team probationary period is crucial for

hiring employees in these positions,
as they may not appeal to everyone.
 Credit Manager Job Description
The credit manager manages credit granting processes, including policy application,
customer reviews, and credit worthiness assessment, with the goal of optimizing sales
and bad debt losses.
They report to the treasurer or chief financial officer, not sales departments, as the credit
function serves as a counterbalance.

Management Tasks
Maintain a department organizational structure sufficient to meet all goals and objectives.
Properly motivate the credit staff
Measure department performance
Provide for ongoing training of the credit staff
Manage relations with credit reporting agencies
Manage relations with credit insurance providers
Manage relations with the sales department
 Credit Operations Tasks

Maintain the corporate credit policy

Monitor industry trends
Recommend changes in the credit policy to senior management
Create a credit scoring model
Update customer credit files
Monitor the credit granting and updating process
Accept or reject credit recommendations forwarded by the credit staff
Conduct on-site visits with the largest customers
Monitor periodic credit reviews
Monitor deductions taken from payments by customers
Monitor the application of late fees to customers
Monitor the corporate leasing program
 Credit Clerk Job Descriptions
A credit clerk reviews credit applications and monitors current customers to examine their
credit levels.
While not required for a college degree, a thorough understanding of financial statement
analysis is essential for credit granting.

Key Elements
Process credit applications from new customers
Conduct trade and bank reference checks
Establish credit limits based on credit criteria
Maintain records of credit reviews and document reasons for credit limits granted
Monitor credit usage by existing customers
Monitor financial and credit condition of customers
Review existing credit limits at regular intervals
Provide credit information to third parties upon request
 Collections Manager Job Description
The collections manager oversees customer interactions, agency management, and
attorney relations.
They collect problem information and pass it to the company for resolution. Reporting to
the controller, they manage collection activities and ensure smooth operations.

Key Elements
Maintain a department organizational structure that can meet all goal and objectives
Monitor the use of collection techniques
Monitor payment deductions taken by customers
Properly motivate the collections staff
Measure department performance
Conduct staff training as needed
Review and approve negotiated settlements with customers
 Third Party Interaction
Provide feedback to other departments regarding collection issues originating internally
Manage relations with collection agencies
Manage relations with collection attorneys
Manage relations with outside skip tracers

The collections manager's primary responsibility is to standardize customer contact

processes, ensuring acceptable collection behavior and adhering to applicable laws.
They monitor collections trends to identify patterns that may require credit policy changes.
By analyzing all collection activities, they can detect subtle increases in sales outstanding
across the entire customer base or specific customer concentrations
 Collector Job Description
responsible for collecting the maximum amount of overdue funds from customers.
must have dogged persistence in contacting customers at regular intervals and the
negotiation skills necessary to extract payments from customers.

Key Elements
Stratify collection activities to maximize cash receipts
Issue dunning letters to overdue accounts
Use skip tracing techniques to locate customers
Contact customers regarding overdue accounts and determine reasons for non-payment
Issue payment commitment letters
Negotiate the return of unpaid merchandise
Repossess merchandise when payment is unlikely
Monitor cash on deliver payments
Issue credit hold notifications
Recommend that accounts be shifted to a collection agency
Process small claims court complaints
Skip Tracer Job Description
A private investigator who locates people who
do not necessarily want to be found.
Research, database skills are needed
Work hours can be long
Need social skills to extract info from
associates of missing person
Probationary Period
When hiring for a precedent position, certain
qualities are needed.
This period is used to evaluate whether the
person is suitable for the job.
Once a person is deemed not suitable, the
person must be terminated.
 SUMMARY
This chapter discusses the role of the credit department
from an organizational point of view. Proper structuring
of the credit department—from a one-person operation
to a multi-tiered, multifunctional entity—ensures that the
role of credit contributes to the overall success of any
company regardless of size. The role and
responsibilities of each member of the team for the
proper functioning of the department and the different
types of operations; Centralized and Decentralized
structure.