The Bao Lyon Group, LLCAccounting tips
Volume of credit sales are significant
Accounting and finance expertise is needed
Good customer relations are essential
Credit control might be relaxed
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
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
"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."