Components of a Sales-Driven Credit Function

Photo: DNY59

Capturing sales is the raison d'être of the credit function.

The reasons that customers need (or want) credit before they'll buy from your company are varied. But, generally, there is a lag between the receipt of goods and services and cash flow generated from the goods and services; that is, your customers may need to resell or add value to your products before they can pay your company. Or, your customers want to see if your company can deliver on its promises and will withhold payment until your company performs according to agreed-upon terms.

Offering credit should attract the customers you'd like to do business with and close the sales you'd like to make while supporting your company's needs for profitability. To accomplish your sales goals, create a credit function with these components.


The strategy lays the foundation of the credit function. Define the strategic reasons your company is offering credit. Let these reasons shape your policies and approach to interacting with customers from initial reviews of creditworthiness through follow-up communications.


Design credit policies to support the sales goals of your business, manage risk associated with credit exposure, and achieve your cash-flow needs. Policies can cover:

  • Terms and conditions of the sale
  • Set-up of new accounts including credit application and credit line approval processes
  • Billing (invoicing) procedures
  • Management of accounts receivable (A/R) balances
  • Procedures for dealing with past due accounts
  • Accountabilities of credit department staff members, defining those with the authority to extend credit, override standard policies, and update policies
  • Methods of controlling risk, such as requiring a personal guarantee on transactions

Communicate these policies to your credit team as well as those who produce sales, handle transactions, post payments, and make collection calls.

Credit Analysis and Approval

Before your company offers credit to a customer:

  1. gather information on its financial condition using a credit application
  2. evaluate creditworthiness
  3. establish a credit line equal to the amount the customer can reasonably afford and you can extend for a set period of time.

The credit application and your company's subsequent analysis provide you with the tools to establish a credit line as well as invoice the customer and collect on outstanding balances. Components of the application may include:

  • company officers
  • contact information, such as email address for electronic invoicing and phone numbers for follow-up communications
  • bank and trade references
  • business tax ID numbers

To avoid the expense of evaluating credit and setting up accounts for one-time customers or those that purchase small amounts infrequently, consider skipping the credit check. For sales amounts below a certain threshold, your company could require payment via charge card. Later, if a customer orders larger amounts, require an application and set up a credit line.

Accounts Receivable (A/R) Management

If your company offers credit, then you'll need an A/R function to generate invoices and apply payments to these invoices. Your controller, accountant, or credit manager can direct or perform these duties, such as:

  • Create and distribute invoices
  • Communicate with customers regarding invoice adjustments, due to promotional discounts, early-payment discounts, or charge backs
  • Record (or post) payments to each customer's account
  • Create reports indicating the status of each account for follow-up purposes
  • Produce and distribute monthly statements indicating account balances
  • Report A/R balances with information on accounts that are past due (dollar amount and number of days past due for individual customers and entire company).


If a customer fails to make a payment according to terms, then you'll need to follow up to collect money that's owed to your company. Having a collection plan makes this process easier and allows your company to document the steps taken to bring the account to current status. These steps may include phone calls and letters as well as placement of credit holds to prevent shipment of additional orders until outstanding balances are paid.

There are many steps and approaches to collections but if you're interested in preserving relationships with repeat customers, then start by investigating why the customer hasn't paid. Make sure the customer has all the information needed to pay you, such as purchase order numbers, tax ID numbers, and correct addresses. Let your sales representative make an inquiry about any problems. Settle any concerns or disputes as quickly as possible.

You may need to negotiate a revised payment plan, and then track customer compliance to this plan. If these efforts fail to produce payment, you can contract with an outside agency or attorney to handle collections; having documentation of credit agreements and collection activities is useful in this stage.

At every step, from strategy through collections, keep in mind the reason your company took the risk of giving credit: to generate sales. International Speaker/Trainer/Consultant Abe WalkingBear Sanchez of A/R Management Group, Inc. (in his article, B2B Credit is About More Sales) explains:

"The only reason for a business to incur the additional costs that go with extending credit to their customers is to get a profitable sale that would otherwise be lost. If business customers have the ability [and willingness] to pay up front extending credit should not be considered. If they can cut a check with the order...grab it."

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