3.4 Management of Working Capital 47- pre-legal action (the monitoring of outstanding accounts, the focus is now on
identified clients); and - legal action (legal action is taken after customer analysis).
During the sales process, the firm screens its customer’s past payment perform-
ance and creditworthiness in order to make credit decisions and set credit terms.
Screening helps the firm to: manage its total credit exposure; minimise Days Sales
Outstanding (DSO); and increase profitability.
During the sales process, the firm also decides on credit terms. The choice of
credit terms should depend on the customer’s estimated payment behaviour. Based
on the level of trust, the firm chooses: the method of payment; to what extent the
customer can order goods only within prepaid limits; credit terms including credit
limits; and the terms applied when the customer fails to pay on the due date (de-
fault interest, penalties).
During the collection process, the firm decides to what extent it should out-
source the collection process and whether it should introduce factoring. For exam-
ple, the firm can buy del credere protection (insurance protection) against de-
fault.^100
At the pre-legal action stage, the firm monitors identified customers. It is nor-
mal for the firm to stop further supplies if the customer fails to pay.^101 This is fol-
lowed by the collection of debts. The internal credit guidelines of the firm should
set out the key aspects of the recovery process of past due accounts.
At this stage, important legal questions for the firm’s credit manager include:
duties, if any, to notify the debtor of its breach of contract;^102 right to default inter-
est;^103 collection and set-off rules;^104 and defences available to the debtor (in par-
ticular, breach of contract by the creditor and statutes of limitation).^105 Further-
more, the credit manager should understand the rules that govern the assignment
of claims^106 as well as the rules on collateral. In the case of a race to collect pay-
ment or obtain better collateral, the credit manager should know about insolvency
laws that can cause transactions to be reversed and provisions of law that that set
out which creditor will prevail in the event that the same collateral has been prom-
ised to two or more creditors. Most of such questions have been discussed in Vol-
ume II.
The firm can take legal action if the customer still has not paid. This can be
complemented by the registration of losses.
Legal aspects of payment terms. Laws generally say very little about the terms
of payment offered to customers.
(^100) For German law, see § 394 HGB.
(^101) The seller can usually suspend the performance of his obligations under the contract.
See CISG Article 71(1) and CISG Article 71(3).
(^102) For German law, see § 286 BGB.
(^103) CISG Article 78.
(^104) For German law, see §§ 387–396 BGB.
(^105) CISG Article 50. For German law, see § 437 BGB (Mängelrüge).
(^106) For German law, see § 398 BGB and § 453 BGB.