CLP Quick Study
Accounts Receivable Management
The first step in managing your receivables is managing how you grant credit. Having a well-developed credit policy, then training staff to use it, will reduce the chances of granting credit to the wrong people.
Credit policy
All companies should have, and follow, written credit policies. Your policy is determined by:
Type of business. For example, if most of your sales are retail (such as residential design/build), it may be easier to get cash deposits and payment immediately after the work is completed. However, if you are carrying out large commercial projects, you have no choice but to offer credit terms that are often outlined in the contract.
Credit policies of competitors
If all your competitors offer credit, you will be forced to do the same.
Availability of working capital
The more generous your credit terms, the greater your company’s need for working capital.
Before you grant credit, you must know the answers to these questions:
• Can the buyer pay as promised? (Do a credit check, or talk to others in the industry that have sold to the buyer.)
• Will the buyer pay? (What is his track record?)
• Can the buyer be forced to pay? (This can be achieved with personal guarantees or project liens.)
• Can you improve your cash flow by helping the buyer finance the work?
• Can you phase the work over time to help the buyer’s cash flow?
Collection procedures
Categorize slow payers before dealing with them:
• No ability to pay – settle the bills as soon as possible, before it gets worse
• Slow bureaucracy – try to issue your bill sooner
• They are just slow – factor the cost of slow payments into future prices
• They are not happy with your work
• Something out of the ordinary – find out why,and get a commitment to fix the problem
The following are ways to improve your collection success:
• Make collection calls early in the week
• Talk directly to the person who signs the cheque
• Make the call friendly, use the person’s name
• Give the buyer a chance to explain. There may be a reason for the delay
• Try to get a commitment for at least a partial payment, then use that amount to arrange a regular payment
• Restate the agreed-upon details before hanging up
• Send a letter or fax confirming the details agreed on
• After setting a deadline, stick to it
•B e persistent, be persistent, be persistent.
