The credit department must make difficult decisions and take actions to implement those decisions every day. Some people enjoy being involved in the credit decision-making process. Some do not, often because in the credit field there are almost no absolutes. There are no absolutely correct or totally incorrect credit decisions. Some people acknowledge the uncertainty and welcome the challenge, and others do not. A small number of individuals delegated the task of making credit decisions effectively freeze up and are incapable of making important decisions involving significant amounts of money in the form of offering credit terms exactly because the information available is insufficient to determine with sufficient certainty that the would-be customer has the ability and willingness to pay their debts to the creditor as they come due.
There are a number of factors that influence the credit decisions being made. In each company, the relative importance of each of these factors is different. What remains constant is the fact that credit managers do not operate in a vacuum unaffected by the goals, the problems, and the challenges facing the companies they work for. Credit managers that fail to appreciate the needs of their employer will be seen as lacking in business acumen at best, and as expendable at worst. Some of the more important factors affecting credit decisions include:
1. Competition. Competition will affect your decisions relating to establishing a more lenient or a more rigid credit policy. The stiffer the competition, the more likely the credit policy will be more lenient. In a buyer's market in which supply exceeds demand and the quality of goods offered by various suppliers is comparable, credit policies tend to become more liberal over time.
2. Terms offered by competitors. Generally speaking, the longer the terms competitors offer, the longer the dating your company must offer in order for its products to remain competitive.
3. The laws of supply and demand. When demand for your company's goods and services exceeds supply, the credit manager can have a more conservative philosophy than when supply exceeds demand.
4. General business conditions. In a recession, business may be exceptionally slow. A liberal credit granting policy combined with relaxed collection efforts may be a way to increase sales revenues.
5. Changes in demand for your company's products. When demand for your goods and services is in decline, additional pressure will be brought to bear to liberalize credit granting to retain existing customers and to attract new customers.
6. The amount of bad debt losses experienced. If bad debt losses are higher than expected, senior management may insist on a more restrictive credit policy
7. Inventory levels. High levels of inventory tend to result in pressure to offer marginal customer larger open account terms. The same is true if inventory is seasonal, subject to spoilage, or is custom designed.
8. Profit margins. In theory, the higher the profit margin, the more credit risk companies are willing to take.
9. Market share goals and strategies. If your employer wants to increase market share, chances are good that credit terms will be one element of the negotiation process.
10. The experience of the credit department staff. The more experienced and educated the credit manager and his or her subordinates are, the more sophisticated the credit risk mitigation and management process tends to be.
A note of caution. Any time a creditor company makes a decision to become more lenient [meaning less risk averse] in response to any of the ten factors described above, they must appreciate the fact that when [not if] business conditions change and the creditor company decides it wants to be more risk averse, that creditor company is likely to experience a significant amount of push-back from customers accustomed to the less risk averse way of managing the open account credit relationship with customers. For example, if a customer is offered an increase from 30 to 45 day payment terms in order to stimulate sales, it will be difficult to convince that customer to start paying invoices in 30 days again