Not all companies review credit in exactly the same manner. Depending on the nature of the business, the corporate culture, the resources devoted to the credit review process, and the amount of credit granted with open terms, companies set credit review guidelines. The range of what is done is quite wide. The following list includes just a few of the ways companies evaluate credit of the new customers:

• Every new customer must complete a credit application.

• Have credit policies and procedures in writing and have them approved by senior management. This approval helps the credit department should sales try and bend some of the rules.

• Call all new customers and explain discount terms. Encourage customers to call before taking any deduction.

• New credit applications are reviewed thoroughly and questionable accounts put on cash-on-delivery (COD).

• Use multiple sources of information, including the Internet, to obtain factual data on companies.

• Pull credit reports on new customers over the Internet, allowing quick turnaround on credit applications.

• Sales and credit review customer programs in detail. Profitability analysis, capacity, and other key factors are all part of the credit line granting process.

• Have the board of directors revise and clarify credit policy and terms.

• Divide the credit application into two parts: the credit agreement and the application for credit. • Streamline the new account set-up process.

• Assign one person to set up new accounts, send out credit applications, and process them once they are completed and returned.

• Have all customers complete an application and a customer profile so the credit analyst can see the big picture.

• Redesign the credit application so it is easier to fill out. Eliminate any meaningless requirements and add slots for e-mail addresses and customer Web sites.

• Set up form letters on the personal computer (PC) to autofax for credit references.

• Require bank/trade references with completed credit application.

• Work with sales on the credit application process. Make sure they get a signed contract and authorization rather than just a verbal commitment.

• Make the credit approval for all new customers consistent. Require the same information from all before credit is granted. Once the process is standardized, the sales reps know what will be required and make sure the customers supply it.

• Automatically give new accounts a small credit line with minimal credit checking. Then reevaluate based on financial information and payment habits.

• Formalize a thorough process involving pulling credit reports, reviewing the customer’s completed credit application, and accessing financial information over the Internet.

• Have a training program for the existing credit staff to make sure they all understand the nuances of credit and are using the same corporate standards.

• Hire a full-time credit administrator to monitor the creditapproval process.

Just because a rigorous credit evaluation was completed when a company first becomes a customer does not mean that analysis is good forever. Most experts recommend that credit reviews of all accounts be done at least once a year. However, the reality is that ongoing credit reviews are one of those things that get pushed back when the credit staff does not have enough time to do all the work that it has on its plate. IOMA statistics show that only about 50% of all companies review all accounts annually. This is too bad because long-term customers do run into financial difficulties and it would be nice if you were able to cut your firm’s exposure before the customer can no longer pay. Here’s a sampling of how some companies review the credit limits of their existing customers:

• Each month, the computer generates a list of all customers that are up for their annual review.

• Request updated financial statements from major accounts. Also pull updated D&B reports, and get trade credit reports from local trade groups.

• Review current credit limit and past payment history to determine if higher credit limits should be granted to each customer once a year.

• Review existing accounts with controller once a year and discuss the status of each.

• During the slow time, the top 75 customers are reviewed. For some companies the slow time is May, June, and July, but it may differ for other seasonal businesses.

• Depending on the level of activity in the account, each customer is reviewed annually or semi-annually.

• Only review the top 25 customers each year.

• Customers with large balances or changes in their payment habits are reviewed each year.

• Continually monitor largest customers. Any customer who has not done business with the company in over a year is forced to go through a new credit check.

• Accounts are all set up for annual review by placing an indicator in the sales system. The list is printed monthly and the accounts updated. Depending on the credit limit, the update may consist of obtaining new financial statements, updating credit reports, and trade and bank references.

• Have procedures in place to request financial statements annually. Input the follow-up information into a credit rating model. Those customers whose ratings come out poor or marginal are then reviewed in greater detail.

• Depending on the size of the company and whether it is private or public, the financial statements are reviewed, references are updated, and the past history with the company is reviewed. Credit limits are reset based on this evaluation.

• If a customer consistently bumps up against its credit limit but pays within acceptable limits, the limit is reviewed. If the payment history is not acceptable, “the whole enchilada” is done again.

• Accounts due for annual revision are compiled in a monthly report. An analyst uses the report to determine which accounts need to be reviewed.

• The credit manager and the assistant credit manager review customers’ creditworthiness along with input from the salesperson.

• Pull simple Experian credit reports to show changes. Look at the payment record and sales levels to determine next action.

• Update data by mail and phone.

• Update information from the credit bureaus and National Association of Credit Managers (NACM) reports.

• Use credit scoring to determine which accounts get reviewed.

• Only review major accounts. Review annual reports and a three-year spreadsheet. Also discuss the customer at credit groups.

• Run reports to show which accounts have orders that will exceed their credit limits. These accounts are then reviewed.

• Evaluate current payment patterns, and update trade references and financial information for a formal review of the credit limit.

• New credit reports, financial information, and trade references are assembled. A log is kept of all files in review. A recap sheet is completed for management review. A last review date is updated in the computer.

• Only accounts with large credit lines are reviewed.

• Maintain a monthly analysis of all customer credit lines and sales and payment methods.

• Conduct a thorough analysis two to three times a year with upper management and monthly meetings with the department staff.

• Set a goal of having all accounts updated every 18 months. Get a monthly listing of all accounts that have not been updated within this time frame, and make sure an account’s last review date shows on all accounts receivable screens.

• Review those accounts that are very active and purchase over $100,000 each year.

• For some companies, an annual credit review is an audit requirement. All accounts carry an annual review date, which posts automatically to an exception list. Every account is reviewed for performance and appropriate file support (latest trade and bank references, and so on).

• Set the system to flag any order that has not been reviewed for 12 months. Credit is notified and depending on the order value, the history is reviewed, a new credit report is pulled, and a decision is made to extend or change limits for the upcoming year.

• All credit managers review their areas of responsibility in total. Also, a credit check program alerts if a credit is more than 12 months old.

• Based on average accounts receivable balances, reviews are done quarterly, semi-annually, or annually. New financials and trade reports from industry groups are obtained. Any other information with the exception of new trade references is also acquired. If the customer is international, a country report is also pulled.

• Run customer profiles and go through an average days of payment to try and pinpoint potential trouble before it occurs.

• During the first quarter, accounts with limits over $25,000 are reviewed. In the second quarter, those with limits between $10,000 and $25,000 come under scrutiny. The third quarter is spent focusing on those with lower limits, and the fourth quarter is spent making sure that credit files for every active account are in place and updated.

Credit professionals should try to review existing accounts at least once a year not only because it is a good business practice but also to protect themselves.When the credit review is done, the documentation should be put in the file and any recommendations should also be filed. If management overrides you, it is imperative that at a minimum a note to this effect be put in the file. Ideally, the override would be in writing—but that is often difficult. The reasons for this are fairly simple.When one of these marginal accounts goes bankrupt and ends up owing your company thousands (or more) of dollars, management is going to point a finger at credit and ask “why wasn’t credit on the ball to see this trouble coming.” If you have a notation in the file that you warned management and sales, and they decided to ignore your advice, you will avert the blame. They still won’t be happy with you, but at least credit won’t shoulder the full responsibility for the loss.