Credit management is a difficult process to integrate into the order entry process flow in an automated manner. At best, systems can be designed to automatically approve modest changes in credit levels, grant credit at very low levels to new customers, or hand off credit issues to employees when order sizes or submitted financial information falls into the manual override conditions designated by the accounting software. Consequently, the inte­grated credit management system noted in Exhibit 1 provides a combina­tion of limited automated credit reviews, combined with some manual credit analysis steps. A number of controls have been removed from the basic process flow shown earlier in order to focus on credit-specific controls.

Exhibit 1 Controls Used to Integrate Credit Management into Order Entry

There is really only one major credit control noted in the flowchart, though it is spread over a number of decision points. An explanation of the control follows.

• Analyze with credit decision table. The beauty of having a computerized order entry system is that a credit decision table can be added to it, so that incoming orders are automatically evaluated based on fixed criteria and either approved on the spot or shunted to a staff person for a more in-depth evaluation. Thus, this is really an efficiency improvement over the standard approach of requiring a person to examine all incoming orders for creditworthiness. The flowchart in Exhibit 1 shows a typical set of credit decisions for the computer system to examine.
• If the order is from an existing customer, it passes to the next decision question; otherwise, it is routed to the credit staff for review.
• If the order from an existing customer is a recent one, it passes to the next decision question; otherwise, orders from customers who have not placed orders recently are routed to the credit staff for review.
• If the order from an existing customer with recent order history is within its existing credit limit, the order is flagged as approved for shipment; otherwise, it is routed to the credit staff for review.

The flowchart in Exhibit 1 is not translated into a procedure, since the bulk of it shows automated controls, and the manual credit review process was described earlier in the procedure.

In addition to the sole credit control listed in Exhibit 1, many addi­tional controls can be added, depending on a company’s risk of incurring credit losses. They are as follows.

• Create a credit policy. A serious control problem arises when there is no formal definition of how to calculate a credit limit, what information is required of customers in order to determine the credit limit, the standard terms of sale, and the collections methodology to be followed. The typ­ical result is widely varying credit levels being granted, inconsistent billing terms, and a poorly managed collection strategy. All of these problems are mitigated through the formulation and consistent applica­tion of a credit policy. A sample policy is included at the end of this chapter in Section 3-7, “Order Entry, Credit, and Shipment Policies.”
• Conduct mandatory periodic credit policy reviews. Any credit policy is based on a company’s financial situation, its product margins and strategic direction, and the general economic conditions at the time when the policy was created. All of these factors can change, making the credit policy less relevant over time. For example, if a company’s strategy is to expand market share with a loose credit policy, this could give rise to extremely high bad debts if the economy suddenly worsens. Consequently, a good control over the credit policy is to require a for­mal review at fixed intervals, with documentation of the results of the review.

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