When you are offering any type of credit to your customers, it is important to provide them with your credit and collections policy. This means that they are aware from the outset of financial expectations, and of the penalties should they pay late.
Positive cash flow is the key to your business success. It is important to be in control of the risk your business assumes when you offer any form of credit. Your product or service may be in high demand, but if you are struggling to collect on your accounts receivable, that amount not collected is a loss. Turning unpaid invoices into cash is critical.
In most instances, customers like to have clearly defined guidelines, so there is no doubt as expectations when it comes to payment. It is important to create a policy that works for your company. There is not a ‘one size fits all’ when it comes to accounts receivable collection. The model you use will vary according to the risk tolerance of your company. If you are not sure how to go about assessing the best course of action, there are risk tolerance questionnaires available to help your company decide.
The Creditors Network created a useful white paper covering how to create and implement an effective credit and collections policy. It details why you need a credit and collections policy, and how to define your specific risk tolerance. For example, will you be liberal on credit, but conservative on collections, conservative on credit but liberal on collections, or somewhere in-between?
The white paper suggests establishing exactly what your goals are, and your tolerance level when it comes to receiving payment. You may want to start all new accounts on pre-payment terms for the first few orders, and then move to net terms once you have established a relationship with your customer. It is also worth considering the following as best practices:
- Check the credit score of your customers to evaluate their ability to pay. You can use a credit-reporting agency, as well as trade references and bank references.
- If your existing customers start paying late, make sure and check their credit score to see if there have been any significant changes. You can always reduce or remove the privilege of offering credit to any customer.
- Invoice promptly, and keep a regular check on unpaid invoices.
- Have a collection plan in place.
- If customers continue to pay late but also continue to order, place a credit hold on their account until they pay their unpaid invoices.
Establishing a strong credit policy will help you keep in line with your company’s financial goals. If your company needs help with faster payment on accounts receivable, invoice factoring offers an effective way to turn your outstanding invoices into cash.