Having a credit policy ensures that
your organization has the cash flow to operate. If you give everyone service
and are relaxed on how soon (if ever) to actually cash in on those receivables,
you may have some assets on your books in A/R that will never be realized as
cash. If you never get the cash, you are
going to go under soon.
One thing to note is that in public
service you might have to essentially give away services at some point. The
book talks about hospitals doing charity care, but it can operate in the same
manner in different organizations. You should have a development department to
make up for the shortfall in funds from services. Having a firm, defined credit
policy about who gets credit and who does not will help the planners in your
organization make plans on budgets and cash flow.
In my experience, there is an interesting
other side to this. Our biggest funder is the state of Illinois, with almost
70% of our operating budget coming in from them. If a funder is a big enough
part of the budget, you lose leverage over your policies. Even in good times,
we have to plan cash flow on not being paid for service we do right away.
Service today might be paid in January. That makes our planners have to be reactive to
the state’s whims.
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