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How to make your AR & Credit policy Effective!

by Evelyne Legaux on 16-07-2020

At a time when the economy restarts & Cash Flow has become CFOs top priority with Credit & Collections under high scrutiny, having the right organization, governance & strategy in place to support it, is paramount to success!

In particular, while rightly focusing on a proactive pragmatic Collections & robust Credit Risk management approach, companies should not lose sight of the importance of operating within a defined reference frame that provides clear guidelines.

And that reference frame providing clear guidelines is nothing else than a company’s AR & Credit policy! We cannot stress enough how important that document is when times are tough & things at risk of going wrong!

Starting today and over the next 5 days, we will be highlighting 5 tips to make your AR & Credit policy Effective!


Day 1 - On this sunny (well…may be later…) day, here is Tip 1: Governance key questions to ask yourself!

Do you have a clear Delegation of approval Authority (DoA) matrix in place that matches your Roles & Responsibilities (R&R) organization structure?

Does your DoA matrix cover all aspects of AR & Credit Mgt that require approval?

Does it reflect the degree of empowerment for each organizational approval level that is suitable in the current unprecedented situation?

And more specifically:

Do you have standard customer Payment Terms in your general Terms & Conditions (T&C’s) of trade? Who has authority to approve customer Payment Terms? Is Finance approval required prior to Sales committing Payment Terms to your customer?

Who has authority to approve customer Credit Limits? Does your DoA matrix reflect the customer portfolio segmentation &/or risk category that is relevant to your business?

Is Finance approval required prior to releasing sales orders from Credit Hold thus potentially causing the AR exposure with your customer to exceed the approved Credit Limit in place that is to exceed the level of Credit risk acceptable to your business?

If your answer is NO to any of the above questions, then NOW is the time to revisit & adapt your AR & Credit policy!

Stay tuned for our next tip!


Day 2 - Here is today’s Tip 2: how Strategic is your Approach to Credit Risk in crisis times?

Do you have clear insights into your customer base risk levels, and a consistent analytical review & Credit decision-making process?

Are you using portfolio segmentation (by customer type, size, industry, business stream, geography or else) &/or a revenue/risk matrix meaningful to your business, to drive your Credit Risk management approach?

Are you factoring the currently exacerbated Political Risk dimension in your risk assessment model?

How aware & understanding is your organization of the various forms Political Risk can take? And how it may impact your business?

Does your policy clearly stipulate what risk mitigation tools your Credit teams are entitled to propose & negotiate in their dealing with high risk customers/geographies?

Have you considered including Trade Credit Insurance or Financing solutions options that may now become more appropriate to help your business navigate through uncertain times?

If your answer is NO to any of the above questions, then NOW is the time to revisit & adapt your AR & Credit policy!

Stay tuned for our next tip!

Keep well & safe everyone!


Day 3 - Here is today’s Tip 3: how Adequate is your Approach to Bad Debt Provisioning in crisis times?

Per the accounting principle of prudence, Bad Debt provisioning should reflect the probability-weighted amount of bad debts expected to arise from uncollected trade receivables.

Have you performed a thorough risk assessment of your customer portfolio?

Is your Bad Debt provision specific? That is associated with identified trade receivable balances for which the collections risk is deemed high due to the debtor’s financial distress or inability to pay?

Given the rapidly changing economic environment arising from Covid-19 & considering the related impact on debtors’ circumstances, more than ever Bad Debt provisioning requires increased focus & consideration.

Have you revisited your policy to include the Covid-19 related rapidly deteriorating risk profile of your portfolio?

Is your policy robust enough to respond to these changes with an adequate level of provisions held at all times?

To be IFRS9 compliant, your Expected Credit Loss (ECL) or impairment of asset calculation should be based on both historical performance & forward-looking information, therefore adjusted each time new information becomes available &/or expectations change.

Have you included forward-looking information in your policy such as assessing the impact of political risk, recession, industry specific factors or the wider effects of the Covid-19 pandemic?

If your answer is NO to any of the above questions, then NOW is the time to revisit & adapt your AR & Credit policy!

Stay tuned for our next tip!

Keep well & safe everyone!


Day 4 - Here is today’s Tip 4: Is your business “Covid-19 fit” when it comes to the concept of Force Majeure?

It is essential for companies, impeded in the performance of their contractual obligations by Covid-19, to understand if the concept of Force Majeure can be used to justify same in the jurisdiction where the commercial contract is governed.

Is a Force Majeure clause included in your general T&C’s of trade & commercial contracts with third-parties?

  • If yes, is pandemic a listed event that constitutes Force Majeure? Does it trigger the right to suspend or terminate the contract?
  • If not, could a pandemic still be legally considered as a Force Majeure event in the applicable jurisdiction or not?

Have you considered using ICC Force Majeure clauses to overcome the hurdle of varying interpretations of this legal concept under national governing laws?

Should you become unable to fulfil your customer’s purchase order, do you know how to successfully invoke Force Majeure?

Should your vendor/customer invoke Force Majeure to justify supply interruption/non-payment, do you know what practical steps to take to respond to it?

Should a dispute arise over who bears the risk of performance impediment when supply is interrupted, does your dispute resolution clause protect your enforcement rights?

If your answer is NO to any of the above questions, then NOW is the time to revisit & adapt your AR & Credit policy!

Stay tuned for our next tip!

Keep well & safe everyone!


Day 5 - Last but not least…here is Tip 5: Will your Retention of Title (RoT) clause achieve anything?

RoT is a security in case of a buyer’s non-payment allowing the seller to retain title to (ownership of) the goods delivered under open credit terms until paid for in full by the buyer.

To be enforceable though, the RoT clause must be properly incorporated into your 3rd party contract, the goods must be identifiable as the seller’s (you) property & stored separately from others by the buyer (your customer), the seller must be protected if the buyer is allowed to resell before the goods title has passed to them (national laws may interpret this rule in varying ways). You must have the right to inspect the buyer’s premises & promptly recover the goods in case of non-payment.

Do you rely on your general T&C’s to prove your title if your buyer doesn’t pay?

Is your RoT clause enforceable in your buyer’s country? Do you know if it requires local registration? Does it work in the event of your buyer’s insolvency?

Is your Credit Insurer satisfied with your RoT clause?

If your answer is NO to any of the above questions, then NOW is the time to revisit & adapt your AR & Credit policy!

This concludes our 5 Tips series, we hope that you have enjoyed it!

Keep well & safe everyone!