Overcoming common credit policy mistakes

08 May 2015

BDO Australia |

Businesses can better manage their funds and protect their financial position by implementing a strong credit policy coupled with efficient procedures. Unfortunately, it's easier said than done.

Where do many organisations fall short?  

For a proactive approach to managing credit, you need to identify which problems could be interfering with your company's cash flow and financial security, and then take action to mitigate them. And that starts with understanding the types of oversights that commonly cause issues for organisations.

With respect to general credit policy, some of the biggest pitfalls are: 

  1. Failing to provide for personal guarantees when your customer is not an individual or partnership, or if included it's not properly executed 
  2. Leaving out charging clauses that allow you to take security over the real property of the customer and/or its directors 
  3. Not communicating stipulations effectively to your staff
  4. Neglecting to monitor or maintain changes in respect to your business, customers or the law 
  5. Falling short on document retention 
  6. Weakly implementing policies such as debt recovery mechanisms  
  7. Misunderstanding how the Personal Property Securities (PPS) Act applies to assets and failing to properly register security interests.

How big of a difference can credit missteps make? Take the PPS Register, for example, not registering a security interest can have wide-reaching financial implications. 

Over the last few months BDO has identified significant risk for some clients totalling in the millions of dollars, where their asset protection as to the PPS Act was non-existent due primarily to a lack of understanding as the PPS Act and the serious consequences that can result from non-compliance. 

Other oversights, such as not having a document retention and management strategy in place, can render good steps useless. For example, what is the use of obtaining a personal guarantee for 10 years if you can't produce the paperwork when it comes time to act? 

What can enterprises do to take control of their credit policy?  

To avoid these pitfalls and manage credit activities in a way that supports business growth - instead of creating vulnerabilities - organisations need to first know what their strengths and weaknesses are. Once you have a solid grasp of what your policies are and whether they appropriately protect your interests, you can take swift action to minimise risk and secure your property. 

This can be a challenging process, especially for organisations that aren't well-versed in the ins and outs of laws like the PPS Act. That's why BDO has developed tools to assist companies with these questions. 

The Credit Control Scorecard is BDO’s approach in assessing a client's strengths and weaknesses in their credit policies and processes. It's about giving credit where credit is due - helping ensure clients retain rights to their assets and receive the payments they're owed.

Many companies need to consider numerous components, and missing out on just one can create a massive amount of unnecessary risk. Getting a stronger handle on credit policies is well worth the effort if you're able to improve your firm's financial security.