Credit & Collection

The practice of offering credit is one of the most arduous aspects of managing a business. To wrap up a sale you need to extend credit. This not only provides convenience to customers but also increases cash flows and reduces bad debt.

However, the downside of extending credit is delayed payment or no payment. Many businesses face costly delays with no way of knowing how to collect overdue receivables.

Credit Policies:

Credit policies should clearly be established before receiving orders. Most up-start entrepreneurs fail to miss the significance of judiciously offering credit and forcefully settling overdue accounts.

Assessing the customer’s earlier payment trends is the easiest way of knowing his paying ability. Customers should be notified if orders surpass limits and told to settle their overdue accounts before further consignment.

While dealing with big companies, always insist on a purchase order. Maintain that all pending invoices be cleared before new orders are accepted. In addition, mail a monthly accounts statement clearly mentioning invoices due and payments received.

However new companies may not have such records. In that case, you should perform a reference check.

Factors to determine credit worthiness:

Reputation:

The moment you receive an order, you should check the customer’s credits profile. Check whether the person was declared bankrupt earlier, what is his educational background, the stability of his job and earning potential.

When it comes to extending credits to businesses, run a background check whether it is an up-start company or an established one, the extent of business operations, the type of business, and history of insolvency or labour problems.

Ability:

Assess the business’s ability to pay. Study whether it is strapped for money or not; has it defaulted on previous loan repayments; and if it has a dubious history of check return.

Capital:

Scrutinize the company’s financial statements such as Cash Flows, Net Worth and Balance Sheet. See whether the company has the ability to take on more debt.

Environment :

This indicates the external environment in which the business is operating. Changes in taxation policies, interest rates, currency and spiraling inflation all influence a business’s ability to pay.

Thus, a careful credit analysis of a client should be conducted before credit approval.

Collections::

  • Collections activities start seriously only when cash flows decrease.
  • The longer you delay, the more difficult it is to get paid. Moreover, if the customer goes bankrupt, you can kiss your money goodbye!
  • When a customer fails to pay, call or write to him expressing urgency of pending invoices. Extract a commitment for a full payment. If the customer is unable to pay, settle for a part payment or a promise to pay on a future specified date.
  • Mail scores of reminder notices and call frequently to demand settlement. Follow up aggressively until the collection is effected.

Collection Services:

Most businesses find running their credit and collection activities frustrating. This is where collection services come in. They help put an end to cash flow problems through successful recovery of debt. They save on time and effort that can be invested more profitably. Each case is handled professionally, backed by years of experience.

Procedure:

  • Once the collections agency is handed over the case by the concerned business, it drafts and sends a Letter of Demand whereby the defaulter is given a week to settle his account.
  • If he fails to respond, the case is assigned to a Field Officer, who meticulously studies the account and follows it up from the preliminary period to the final stage of recovery.
  • On payment by cash, the Field Officer issues a receipt to the debtor and the Collections Agency makes out a company cheque to its partner. Otherwise, the debtor is asked to make out a cheque in favour of the partner.
  • If the debtor is unable to make full payment, the Field Officer evaluates the debtor's financial position and draws up a regular installment plan.
  • The Collections Agency is paid a commission for the recovery of debt within a stipulated time frame. The Agency forwards progress reports to its client keeping them informed of the reasons for non-payment and the next course of action to be taken.
  • Thus, collections agencies provide a rational and cost-effective means of collecting accounts receivables.