Trade receivablesapproach that could also be used is to look out for customers who are taking longer
than usual to pay; this may indicate a weakening liquidity position.
Establish effective administration of trade receivables
Systems should be established to ensure:
l that no goods are dispatched or services rendered until it has been confirmed that
the present order will not take the customer above the predetermined credit limit
for that customer;
l that invoices for goods or services supplied on credit go off to the customer as soon
as possible after the sale, thus encouraging the customer to initiate payment routines
sooner rather than later; and
l that existing trade receivables are systematically reviewed and that slow payers are
sent reminders.
Most computer packages for dealing with trade receivables can produce a list, with
the amount owed by each customer analysed by length of time for which it has been
outstanding. This (known as an ageing summary) and similar devices can usefully be
employed by credit controllers in the pursuit of trade receivables.
Establish a policy on bad debts
At some stage it will usually become more costly to pursue reluctant payers than the
amount that they owe is worth. The business should decide on a policy for writing
off bad debts. Once established, the policy should be followed except in unusual
circumstances.
It is important that writing off a bad debt occurs only when all the steps identified
in the policy have been followed. It is also important that writing off bad debts can
only be authorised by a senior employee.
Consider offering discounts for prompt payment
A discount for prompt payment (or cash discount) is an allowed reduction in the
amount due from those trade receivables that pay within a specified time, for example
one month of the transaction concerned.
The costs and advantages of allowing discounts should be assessed. If the business
establishes a particular policy of allowing discounts, care should be taken to ensure
that customers are allowed to deduct discounts only when they have in fact paid
within the specified period.
Consider factoring trade receivables
It is possible to enter into an arrangement with a trade receivables factor (many are
subsidiaries of commercial banks). Here the factor collects the amounts owed on
behalf of the supplier business. The precise arrangements can vary considerably but,
fairly typically, payment (at a discount) is made by the factor, immediately after the
sale. The factor then goes on to collect the money and to manage all accounting and
administrative matters concerned with it. This relieves the supplier of the administrat-
ive and financial burden of granting trade credit, but at a cost.
‘Invoice discounting’ is a very similar arrangement.
Manage exchange rate risk
Where the business is involved with credit sales in a foreign currency there is the
danger that an adverse shift in the exchange rate during the period from the credit sale