How to create a credit policy plan that reduces risk and DSO
Learn how to develop a business credit policy that improves collections, reduces DSO, and aligns your team—step by step.
According to the Credit Research Foundation, only a small percentage of credit departments have formalized credit policies. However, implementing one can lead to major improvements in accounts receivable (AR), cash flow, and collections efficiency.
A credit policy isn’t just a document—it’s a tool that helps align your finance team, improve customer relationships, and minimize risk. This guide outlines six steps to help you build a credit policy plan that supports your goals, standardizes your collections process, and gives your business the structure it needs to scale responsibly.
What Is a credit policy plan?
A credit policy plan outlines how your business evaluates, extends, and manages customer credit. A strong plan should help:
- Reduce bad debt and write-offs
- Shorten the order-to-cash cycle
- Improve visibility into AR risk
- Align cross-functional teams on consistent credit procedures
The policy should define key roles and responsibilities, document credit and collections workflows, and establish performance targets such as Days Sales Outstanding (DSO).
Step 1: Assess your current credit practices
Before you create a policy, gather the data and context you need to make informed decisions.
Analyze your customer base
Segment customers by:
- Industry (e.g., NAICS/SIC codes)
- Sales volume
- Account age (new vs. long-term)
Look for patterns. For example, newer customers might pay faster than legacy accounts due to improved onboarding or updated credit checks.
Review key metrics
Track baseline metrics to understand your current position:
- DSO
- Bad debt write-offs
- Disputed invoices
- Broken payment promises
Use this data to set measurable targets later in the process.
Step 2: Define goals and mission
Create a credit mission statement
Align your credit strategy with broader business objectives. A sample mission could be:
“To provide accurate, timely, and customer-friendly credit services that support growth, minimize risk, and maintain positive client relationships.”
Set performance goals
Use your benchmark data to create measurable goals. For example:
- Reduce DSO by 15%
- Lower bad debt write-offs by 10%
- Improve invoice accuracy and dispute resolution time
Even small changes to DSO can significantly improve cash flow.
Step 3: Build a cross-functional credit team
Your AR strategy is only as strong as the team behind it. Assign clear responsibilities to:
- CFO: Oversees credit policy performance and legal issues
- Credit Manager: Leads credit decisions, collections strategies, and escalations
- Sales Reps: Submit credit applications and collaborate on account follow-up
- AR Clerks: Generate and send invoices, verify accuracy, and maintain records
- Collectors: Follow up on overdue accounts, resolve disputes, and report issues
Every role should have documented responsibilities and escalation paths.
Step 4: Standardize and document collections procedures
Clearly define how your team should manage collections across customer segments:
Customize by credit class
Develop separate procedures for:
- Government vs. commercial clients
- High-risk vs. low-risk customers
- Large vs. small accounts
Adopt best practices
- Use templates for dunning letters and email reminders
- Track dispute reasons and broken payment promises
- Implement escalation rules based on aging and risk
- Store credit policies and scripts in a central location (e.g., SharePoint)
Step 5: Consider a Credit & Collections Management (CCM) System
Manual tracking and spreadsheets make it difficult to stay consistent. A dedicated CCM solution like Sage AR Automation can help you:
- Automate invoice delivery, reminders, and dunning letters
- Centralize documents, customer notes, and payment history
- Track KPIs like DSO, collection efforts, and dispute resolutions
- Reduce labor costs and improve AR team productivity
Companies that implement automation often see 10–20% improvements in DSO and significant savings in admin time.
Step 6: Commit to continuous improvement
A credit policy isn’t a static document. Review and revise it regularly to:
- Adapt to new markets or customer types
- Reflect changes in payment behavior or industry regulations
- Align with updated company goals
Empower your team to contribute to improvements by tracking insights from collections, disputes, and customer feedback.
Final thoughts
Creating a credit policy plan doesn’t have to be complicated—but it does need to be intentional. By following these six steps, you can build a framework that improves collections, reduces risk, and aligns your team on shared objectives.
A modern, automated system like Sage AR Automation can help you implement and enforce that policy more effectively, protecting cash flow while allowing you to focus on growth.
