Indiana Jones & the Credit Trilogy
Raiders of the Lost A.R.C.
By Robbie Burch
“I’m going after a kind of incredible historical significance, you’re talking about the boogie man. Besides, you know what a cautious fellow I am.” — Indiana Jones
Any business, regardless of size or type, is an adventure, and like any good adventure it is always good to come prepared with the right tools, the right knowledge, and the right mindset. While determining credit risk may not be as glamorous as a search for the Ark of the Covenant, attempting to grant credit without good policies can be just as dangerous. In Part 1 of PICB’s 3 part series on credit we explore the basics that are necessary for a good foundation, and a sound credit policy. The initial process requires 3 basic steps:
- Gather credit information from the customer and from outside sources. Be sure to request both trade and bank references.
- Use a credit application that requests, along with standard information such as the address, phone number, and principals, a Federal Tax ID # and the State where the business is formed.
- Always have your credit policies in writing. Written policies provide an unambiguous standard that minimizes risk.
- An effective credit policy defines the parameters that are most likely to ensure growth and profit. While each policy will be unique to the type of business that is being run, a good policy will increase profits within the corporation’s tolerance for risk.
- In reviewing the credit information that has been assembled it will be easier to see what volume of sales is acceptable based on the creditworthiness of the potential customer.
- The information provided by your customer will determine whether a more liberal or a more conservative line of credit is called for.
Conclude whether a line of credit should be more liberal or more conservative using the following guidelines.
Consider more liberal lines of credit when:
- Increasing market share in a competitive industry
- Attracting sales in a new industry or market
- Gross profit margins on an item being sold are high &
Consider more conservative lines of credit when:
- A company sells a unique item that may not have a very large customer base
- Products are being customized to a customer’s specifications
- General economic conditions are unfavorable
- A company’s financial condition is so extended that it cannot afford to take risks
- The possibility of credit losses in a particular industry are unusually high
In the end your credit policy shouldn’t have to feel like another quote from Raiders of The Lost Ark: •
“I don’t know. I’m making this up as I go.” — Indiana Jones
Your credit policy should have a meaningful impact on improved sales, profitability, and the right amount of risk. When drafting your company’s credit policy you set the agenda for encouraging creditworthy sales and preempting sources for conflict. In Part 2 of our 3 part series we will go over the specifics in creating a General Policy Statement and Credit Approval Procedures. Credit risk doesn’t have to be scary, let PICB help you formulate your own business adventure, and reap the TREASURES and RICHES like Indiana Jones himself.