Management of Receivables^237
Debt Collection
There must be no slackness in pursuing the collection of debts. In most business purely
formal reminders are ineffective, and therefore a waste of money, when an account
has passed its due date there should be early personal contact with the customer either
by telephone or a salesmanís visit or by a letter addressed to a named person in the
customer company. If necessary, there may be a follow up at the higher level of authority.
And this should be followed by a threat to cut off supplies.
The value of legal action against debtors needs to be assessed. When this stage is
reached, the likelihood of the customerís paying is sharply reduced, and additional legal
costs may never be recouped. On the other hand, the action may deter potential future
defaulters.
From the point of view of the salesman every customer is valuable. From the financial
directorís standpoint the marginal contribution from goods sold to a late payer will be
more profitable without sales to that particular customer.
Overdue debts should be the subject of formal discussion between the sales and financial
managers. The reasons for delayed payment should be noted, and decisions should be
minuted on the action to be taken in each case and the people responsible for taking it.
Although the salesmanís job is not complete until his customer has paid the money due,
it is often advantageous for the more rigorous collection procedures to be handled by
finance staff, leaving the salesman free to exercise his persuasive influence with the
customerís buying department.
Credit and Collection Procedures
In the previous section we considered the firmís overall credit and collection policies.
In this section we shall discuss how these policies can be applied to individual accounts.
In this section we shall first discuss sources of information and then the decision to
grant credit. Finally, we shall look at specific procedures that could be utilised to collect
delinquent accounts.
Sources of Information
An individual or firm is requesting credit. What sources of information are available to
judge the credit worthiness of the applicant? Sources that can be utilised are financing
statements, bank references, and credit bureaus.
Financial Statements: A vital source of information is the applicantís financial
statements. An applicant who is in a financially sound position would have no hesitation
in making available his or her financial statements. Interim reports, if available, are
more desirable than annual reports. Audited and CPA certified reports are preferred to