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(^242) Financial Management
50 per cent of the amount collected. For small delinquent accounts this may be the only
feasible alternative.
Legal Action. Legal action is usually costly and there is no guarantee of a payment. If
a firm is in a very weak financial position, legal action will force it into bankruptcy. The
firm may choose to use legal action as a negotiating tool to deal with large delinquent
accounts. With a very large delinquent account, the firm may use the threat of legal
action to appoint more competent management.
Cost of Credit Control
The costs of credit control include the cost of:
l assessing and reviewing creditworthiness;
l checking incoming orders;
l sales ledger keeping, and invoicing
l debt collection.
These costs may occur in various departments of the business, but there should be
some means of identifying them and collecting the total cost, which will have to be
taken into account in reviewing the benefits of the credit policy.
Cash Discount
An alternative or supplement of a formal credit policy is to offer discount for prompt
payment. In considering this possibility it is important to bear in mind that:
(a) customers who normally pay promptly will now become entitled to discount, although
there will be no improvement in the timing of their paymentsí.
(b) some late payers will nevertheless deduct discount from their settlements, and
there may be some practical difficulty in recovering these incorrect deductions.
There are various other ways in which a business can speed up its collection of cash
without requiring the customer to pay any earlier. The most common examples are by
using bills discounting or factoring both of which have been mentioned earlier.
Personal Guarantees
An alternative form of protection against bad debts is to take a personal guarantee in
support of the customerís account. The value of personal guarantees varies considerably
and they are likely to present two problems.
l it may be more difficult to assess the creditworthiness of an individual guarantor
than of the trade customer;