Starting a credit function from nothing requires strategic thinking about structure, systems, and staffing. Many companies add credit management reactively after bad debt problems emerge. Better to build proactively.
When Companies Need Credit Departments
Growth Triggers:
- Sales reaching $5-10M annually
- Customer base expanding beyond 50 accounts
- Bad debt exceeding 1-2% of sales
- Cash flow problems from slow paying customers
- Sales team lacking credit expertise
Small companies often have accounting handle credit informally. This breaks down at scale.
First Hire: The Credit Manager
Your first credit hire sets the foundation. Look for:
Experience Over Education: Someone who’s managed credit at similar sized company beats fresh MBA with no experience.
Systems Thinking: Must design processes from scratch, not just follow existing ones.
Sales Partnership Ability: Will work closely with sales. Adversarial relationships kill growth.
Technology Comfort: Must evaluate and implement credit systems.
Communication Skills: Will train others, set policies, interface with customers and executives.
Expect to pay $70K-$100K depending on location and industry for quality candidate.
Essential First-Year Priorities
Month 1-2: Assessment and Quick Wins
- Review existing AR aging and identify problems
- Implement basic credit application process
- Establish credit hold procedures
- Set up credit bureau access
- Create initial credit policy draft
Month 3-4: Process Documentation
- Document credit approval workflow
- Create collection procedures
- Establish dispute resolution process
- Define reporting requirements
- Set performance metrics
Month 5-6: Technology Implementation
- Select credit management software
- Implement basic automation
- Integrate with ERP/accounting system
- Set up reporting dashboards
Month 7-12: Optimization and Scaling
- Refine credit policy based on results
- Consider second hire if volume justifies
- Enhance reporting and analytics
- Develop customer segmentation
- Build training materials for sales team
Technology Stack Priorities
Must Have Immediately:
- Credit bureau access (Dun & Bradstreet, Experian, Equifax)
- Basic credit management software or robust spreadsheet system
- Document storage for credit files
- Email system for customer communication
Add Within 6 Months:
- Automated collections software
- Reporting/BI tools
- E-invoicing capability
- Payment portal
Add Within 12 Months:
- Advanced analytics
- Predictive modeling
- Workflow automation
- API integrations
Don’t over invest in technology before understanding your needs. Start simple, add complexity as required.
Organizational Structure Decisions
Where Credit Reports:
- Finance/CFO: Most common, emphasizes risk management
- Sales/CCO: Emphasizes revenue enablement
- Operations/COO: Emphasizes process efficiency
Finance reporting is standard and provides appropriate independence from sales pressure.
Policy Development
Your initial credit policy need not be comprehensive. Cover:
Credit Application Requirements:
- What information customers must provide
- Documentation needed for approval
- Timeline for decision
Approval Authority:
- Who can approve what amounts
- Escalation procedures
- Exception handling
Payment Terms:
- Standard terms offered
- Variations by customer type
- Early payment discounts
Collection Procedures:
- When to contact customers
- Escalation timeline
- Hold procedures
Write-Off Authority:
- Thresholds requiring approval
- Documentation requirements
Refine over time based on experience.
Metrics to Track from Day One
AR Metrics:
- Days Sales Outstanding (DSO)
- Aging buckets (Current, 30, 60, 90+)
- Bad debt percentage
Credit Metrics:
- Application approval rate
- Average credit limit
- Credit utilization
Collection Metrics:
- Collection effectiveness
- Promise-to-pay conversion
- Dispute resolution time
Efficiency Metrics:
- AR per FTE
- Cost to collect
- Credit decision cycle time
Start tracking immediately. Baseline data enables measuring improvement.
Common First-Year Mistakes
Over Tightening Credit: New credit managers often over compensate for past laxity, damaging sales relationships.
Under Documenting: Failing to document policies and procedures creates chaos as department grows.
Technology Over Investment: Buying enterprise software before understanding needs wastes money.
Ignoring Sales Partnership: Adversarial relationship with sales undermines credit function effectiveness.
Perfectionism: Waiting for perfect policy before implementing anything. Start with good-enough, improve continuously.
Building Sales Relationships
Credit’s success depends on sales partnership. Strategies:
Joint Training: Train sales on credit process and criteria
Regular Communication: Weekly sync meetings to discuss pipeline
Transparency: Explain credit decisions clearly
Responsiveness: Fast credit decisions enable sales success
Flexibility Within Boundaries: Say yes when possible, no when necessary
Sales should view credit as enabler, not blocker.
Measuring Success
Year one success indicators:
Process Metrics:
- Written credit policy in place
- Documented procedures
- Technology implemented
- Sales team trained
Performance Metrics:
- Bad debt trending down
- DSO stable or improving
- Credit decisions faster than before
- Fewer customer disputes
Relationship Metrics:
- Sales satisfaction with credit function
- Customer feedback positive
- Executive confidence in credit management
Budget Considerations
First year budget typically includes:
- Credit manager salary: $70K-$100K
- Credit bureau subscriptions: $5K-$15K
- Software: $10K-$50K
- Training and professional development: $3K-$5K
- Consulting/implementation support: $10K-$25K
Total: $100K-$200K for year one depending on company size and complexity.
ROI comes from reduced bad debt and improved cash flow.
The Long View
Building credit function is multi-year journey. Year one establishes foundation. Years two and three optimize and scale.
Success requires patience, executive support, and continuous improvement mindset.
