The credit policy is one of the most important documents in a company, which is why auditing firms now routinely review the document as part of their regular audit. Simply put, the credit policy represents the principles, conduct and course of action that a company will follow in the critical areas of credit risks, internal controls and profitability. Typically, the credit policy is a direct reflection of the structure and standards of the organization. This section will provide insight into this vital area of credit and accounting. Companies with Loose Credit Policies May be In For a Rough Ride
As the economy recedes, many companies will find it necessary to loosen long-standing credit policies in an attempt to maintain growth targets. Companies with no credit policies or non-restrictive ones will have nothing to loosen.
Tighten credit standards during the good times and loosen them during the bad times is one of the oldest and most tested of all credit principles and practices. It's based on the sensible premise that when times are good, businesses can afford to be more selective in granting trade credit and terms to customers. When times are bad, however, selectivity is much more challenging in order to maintain growth levels from previous periods. This is particularly the case for publicly-traded companies, which tend to be more top-line focused than their privately-held counterparts.
