The Importance of understanding Credit Philosophy and the relationship with Policy and Process

Much is spoken and written about the importance of Credit Policy and Process, but much less of the importance of Credit Philosophy. This is surprising, since defining and understanding of an organisations philosophy is (or should be) at the very heart of the establishment and effective operation of any credit function. Indeed, the formation of Policy and the adopting of Process and Procedures should be a linear progression after the establishment of The Philosophy. Therefore, The Policy should be the manifestation of the Philosophy and Process should be the execution of Policy on a day to day basis.

How the Philosophy is Defined and by whom

Credit Management is not responsible for developing but should be major influence in its’ evolution. This is the sole prerogative of the business leaders. Most organisations are Sales led, some are Finance led and occasionally some are product led. The leaders or drivers are the custodians of the Philosophy and should be encouraged to be so by Credit Management. The basic definition of Credit Philosophy is:

“How does the Organisation feel about its’ customers and how does it want them to be treated”

This incredibly simple statement belies its’ significance and the depth of considerations that it

  • It is the responsibility of Credit Management to Educate the business leaders and organisation as a whole in the evolution of the Philosophy
  • It requires to be recognised that the Philosophy may differ significantly between different Organisations

  • It requires to be recognised that Philosophy may differ from time to time within one Organisation in client approach. Examples of this would be market penetration, product launch, sales campaigns or Cash Flow Planning

Once the Philosophy is in place with variations recognised it is the responsibility of Credit Management to keep the whole organisation abreast of the Philosophy and either write or amend the Credit Policy to be completely in line with the Philosophy.

Why is it critical that this concept is understood and the approach adopted?

One of the classic mistakes that can be made by newly appointed or qualified Credit Managers is that, in their enthusiasm to apply their new skills and cement their position is to either write or rewrite The Credit Policy of the Organisation. Undoubtedly, this document will be well written and contain all the salient elements that amount to effective operational controls that should lead to tight Collection and Risk Management. However, no matter how well-crafted this document might be, if the question of Philosophy has not been first addressed, it will at some time in the future put the Credit Manager into direct conflict with the business leaders. When it comes to a disagreement
on Credit Terms offered, the extent of The Credit Line or Credit Stop, the Policy will be viewed as that of the Credit Manager and not the Organisation as a whole. Given that Credit and Collection is a support function to the business, this is not situation you want to find yourself in.

How to get the Business Leaders to buy into this process

When the question first is raised on the writing or updating of Credit Policy the Credit Manager MUST formally ask the business leaders to clearly articulate the Philosophy of the enterprise in relation to Credit and Collection. Almost invariably they will ask what is meant by the question. The stock answer to this is:

“How does the Organisation feel about its’ customers and how does it want them to be treated”

This will likely result in a request for further clarification or guidance and The Credit Manager must be ready to guide the business leaders in this regard. At this point there are a couple of questions that The Credit Manager will find useful to ask:

  • Do we expect our customers to abide by their contractual obligations at all times?
  • Do we want all of our customers to be treated fairly and equitably?

These are powerful questions and also leading in the sense that there is only one reasonable answer. When asked in isolation, at the formation of the Philosophy they will answer, yes. This answer will not be necessarily replicated in the heat of an operational argument when they are asked to support a policy that was not written by them and to which the feel no ownership.

At this point the business leaders will, as guided by the Credit Manager, will fashion The Philosophy and the Credit Manager will be able to Write or Amend the Policy within its’ image.

Now that the critical first step has been taken and the Credit Philosophy has been imbedded as the cornerstone of Operational Credit Management the stage is set for Credit Management to take responsibility for the creation of the Credit Policy

For the new or existing Credit Manager it is time to utilise their talent, skills, experience, education and training to create the policy that is appropriate for the enterprise that they represent. As with the Philosophy we still require to adopt a disciplined, structured and thoughtful course that follows some critical principles

  • The finished policy needs to be the Manifestation of the Philosophy at its’ inception and within any future changes. Having been instrumental in the creation of the Philosophy the Business Drivers have to equally identify with the created Policy to reflect shared ownership
  • The Policy should be a reflection of the areas within the influence of Credit and Collection that are used to control the function
  • The policy needs to articulate these areas at the highest level but not down to day to day
    activity. The structure of the Credit and Collection organisation will determine what these areas are. Clearly if the governance is being applied to Collection and Risk management organisation there will be differences if these activities are organised separately. Whether policy is being written for a centralised or decentralised function; again may necessitate differences.
  •  In terms of the volume of written word required in support of this activity these should be few but precise. Therefore, Philosophy should be contained within one to two pages and Policy within three to four pages

The larger volume of words will be contained within the third part of this endeavour. That is the creation of the Process and Procedures Manual that will be what governs the Credit and Collection Operations on a day to Day basis.

The Process and Procedure Manual (sometimes referred to as WOW (Ways of Working) should be a logical follow on from the policy and represent how the policy is executed on a day to day basis by the people working within Credit and Risk Management Functions.

At this point the writer will indulge himself a little and share with the reader some personal views as to how “process” and “process engineering” has somehow evolved from being the junior partner and servant of the Philosophy and Policy to not being the means to an end but the end in itself.

Some readers may find this an extremely confrontational statement and it is absolutely meant to beso. For most of my professional career I have been a Credit Manager at various levels in different International organisations. At one point when the organisation I worked for was taken over by another I was offered my previous role within the enlarged organisation. However, my title was to change from Credit Manager to Process Owner. I immediately declined the offer with the job titledescribed as such on the basis that Credit and Collection is not a process but rather a Profession and/or capability. My rationale is that in order to be considered as a process, all parts of the activity
require to be totally within the control of the enterprise hosting that process. When it comes particularly to Collection and indeed Risk Assessment the science fades and becomes an art. That art is persuasion; that persuasion is to make a third party comply to their contractual obligations and our expectations. Compliance remains as the customers’ gift and can in no way be considered as a
part of our process.

This is not to say process is not important, in fact it is the third and critical element of consideration in this paper and in reality should carry the greatest volume of detail but Process is the servant of Policy and Policy is the practical expression of Philosophy.

Over the years I’ve sat through numerous process engineering sessions and although they bored me rigid I do not decry their necessity. I therefore developed a personal acid test for process development.

  • The hierarchy of Philosophy, Policy and Process should always be adhered to.

  • Processes should always be as simple as possible to use and understand.

  • The output of the process is more important than the process itself.

  • The process when used should make the person who is applying the process working life easier, not more difficult

Interested members should contact Bill for further details – please email

Bill Dunlop