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The Bao Lyon Group, LLC Accounting tips
Volume of credit sales are significant
Most commercial companies sell about two to five percent of their products for cash. The credit department is responsible for the other 95 to 98 percent of the goods and services sold. Businesses have varying percentages of their liquid financial resources tied up in receivables. Actual losses might range from one-half of one percent to five percent of sales without serious results. Depending on markup for profit and other factors. Losses can grow to significant sums very rapidly if not controlled by the credit manager.
Accounting and finance expertise is needed
Knowledge of accounting and finance, along with tact and foresight in customer relations, are qualities that characterize the professional commercial credit manager. You should have some background in accounting to evaluate financial statements submitted by prospective customers. You should have additional financial education or training so that you can estimate risk factors, company profits, and recovery rates. In this capacity, you must be knowledgeable about the cost of money outstanding and its value to your employer. Contact us for details!
Good customer relations are essential
You and your department must also pay attention to customer relations. This quality is necessary for the company to prosper through growth. It is effortless to say "no" to prospective customers, and it is straightforward to demand payment firmly. But, if this attitude raises havoc with sales, then the credit department is not performing its complete function, which is to create a balance between sales and recovery of money. The job of the credit manager is an essential position in the industry. Because your effectiveness is crucial to the success of your company, management will seek help from the credit manager when making critical business decisions.
Credit policies
International economic conditions change. Regional market conditions change. And therefore, management goals change. Management should advise and consult with the credit department when considering a change of policy. Management should call for the expertise of this committee when drawing up new programs relating to sales and the subsequent recovery of receivables. It is your responsibility in the credit department to be aware of changes in economic conditions to advise and assist management with possible difficulties that may ensue. The credit department is a vital segment of a company’s success. You must be aware, that your opinion is critical and you must contribute to the decisions involving proposed changes. Company growth and its credit policies are inextricably tied together.
Credit control might be relaxed
Credit Controls May Be Relaxed: For example, if the company plans a sales expansion program through increased geographic exploration, then there may have to be a relaxation of strict credit policy controls in those areas.
There may be a dollar amount under which no credit check may be necessary. Such a policy may create a problem for money recovery, but it is a situation that is tolerable. You must set up tight controls, so these new accounts remain up-to-date. You recognize that there will be a percentage of credit loss with such a sales expansion program. You must work closely with the salespeople to encourage this expansion while avoiding unnecessary risk.
Commercial and industrial experience has proven the following percentages: of 10 new customers, 6 will pay on time, 2 will pay in 60 to 90 days, and 2 will become collection problems. Always watch your new sales. As money becomes tight, you probably will be getting purchase requests from entities that are in financial trouble.
These customers will bounce from business to business and need your close attention. The company can plan its expansion program based on this experience: of the ten new sales, two to four will be one-time sales and bring a small credit loss; six to eight will become valuable customers in the future, two of whom will consistently pay in 60 to 90 days. In line with these values, the company can project sales expansion, and the controller can anticipate the percentage of recovery. Of course, these figures vary by industry.
There may be a dollar amount under which no credit check may be necessary. Such a policy may create a problem for money recovery, but it is a situation that is tolerable. You must set up tight controls, so these new accounts remain up-to-date. You recognize that there will be a percentage of credit loss with such a sales expansion program. You must work closely with the salespeople to encourage this expansion while avoiding unnecessary risk.
Commercial and industrial experience has proven the following percentages: of 10 new customers, 6 will pay on time, 2 will pay in 60 to 90 days, and 2 will become collection problems. Always watch your new sales. As money becomes tight, you probably will be getting purchase requests from entities that are in financial trouble.
These customers will bounce from business to business and need your close attention. The company can plan its expansion program based on this experience: of the ten new sales, two to four will be one-time sales and bring a small credit loss; six to eight will become valuable customers in the future, two of whom will consistently pay in 60 to 90 days. In line with these values, the company can project sales expansion, and the controller can anticipate the percentage of recovery. Of course, these figures vary by industry.
Faster recovery may be required
Faster Recovery May Be Required: Your industry may experience a tight supply of its raw materials or a profit squeeze through increased labor costs or increased supply costs. In this environment, growth through new customer acquisition may not be critical.
Instead, supplying your existing accounts may be your highest priority. In this instance, the credit department may be required to recover receivables* more rapidly because the profit margin is reduced.
The 70 to 90-day customers must be induced through closer contact - by reminders, notices, and letters and careful personal attention - to bring themselves within your company’s prescribed terms. It is possible that your business may decide to reduce its customer list and sell more of its goods to fewer accounts. This is a policy of reducing inventory, storage space and employees. The credit department will then have to police larger -but fewer- accounts. Contact our offices; we can tailor a solution for your company free of charge!
(*) Contractual services
Instead, supplying your existing accounts may be your highest priority. In this instance, the credit department may be required to recover receivables* more rapidly because the profit margin is reduced.
The 70 to 90-day customers must be induced through closer contact - by reminders, notices, and letters and careful personal attention - to bring themselves within your company’s prescribed terms. It is possible that your business may decide to reduce its customer list and sell more of its goods to fewer accounts. This is a policy of reducing inventory, storage space and employees. The credit department will then have to police larger -but fewer- accounts. Contact our offices; we can tailor a solution for your company free of charge!
(*) Contractual services
"Small companies often offer credit to customers without considering the process as more than a necessity of doing business. But when the health of a small business relies on customer payment of the amounts owed, collecting accounts receivable can become a serious issue. A strong, formal credit policy can help set billing guidelines at the initial stage of a sale and may prevent more work and risk after the sale is completed."
"Establishing an effective credit policy prevents small businesses from over-extending credit to customers and may help them avoid having to devote future time and money managing accounts receivable and collections. Aside from setting a basic credit limit, credit policies should define payment terms, including any required deposits prior to the start of work. Procedures for evaluating a customer's ability to pay should also be a part of credit guidelines."
"Establishing an effective credit policy prevents small businesses from over-extending credit to customers and may help them avoid having to devote future time and money managing accounts receivable and collections. Aside from setting a basic credit limit, credit policies should define payment terms, including any required deposits prior to the start of work. Procedures for evaluating a customer's ability to pay should also be a part of credit guidelines."
- Paychex.com
