Perhaps the most effective way to minimize outstanding receivables and bad debts is by having a strong credit policy in place. The terms and conditions on the credit policy dictate how much credit you can facilitate and the clients who will receive it.
It is crucial to have a written credit policy stating out all the terms and conditions regarding payments, to be able reinforce these terms to your clients.
Here is a simple guide to help you create your own credit policy in a few steps.
Step One: Check Your Customers
Before you offer credit facilities to your customers, make sure you do your due diligence and investigate your client and their creditworthiness. Run a credit check especially for bigger transactions and long-term customers. Research their current liabilities, obtain their credit references.
Let this define the criteria of an acceptable receivable and set a benchmark for any potential clients.
It might not always guarantee payments, but it does help assure a certain level of likelihood that the customer will make timely payments.
Step Two: Set a Maximum Credit Limit
Establish the highest amount of credit your company will allow. Then, calculate how much of this number you will let your clients use for credit.
Rank your clients according to their risk profiles. The higher they rank in terms of riskiness, the tighter you need to set their credit terms.
When agreeing on a credit limit for a client, also review their individual creditworthiness, based on the credit checks you conduct.
You don’t necessarily have to cut down on sales with clients who are at a higher risk of default, but what you can do is offer sales upon cash and advance payments.
Step Three: Payment Terms
It is important that you set out a written policy about the terms and conditions related to making payments to your business. Make sure your customers are well aware of your policies, including any penalty for delayed payments.
Include this in your contracts, credit form and even on your invoices to make sure your clients are made aware of the policy.
Having them written out allows your company to bring it up as evidence in case of any disputes or misunderstandings. It ensures that the company has something to fall back on in case your clients start to make excuses about lack of clarity.
When you maintain a clear approach regarding your business’s policies, the clients know exactly what is expected of them so they can make their payments as and when required.
Step Four: Enforce the Credit Policy
Keep the terms and conditions straight forward, fair and clear so that it doesn’t leave any potential or existing customer in doubt. Publish it on your website, service agreements, contracts and invoices so it doesn’t risk being missed out by any client.
For bigger account receivables, set up a face to face meeting to outline the terms of the company’s credit policy to ensure full understanding and clarity. This will also convey your seriousness about the policy to your clients.
Step Five: Set Follow-up Action
You need to decide on the follow-up action in case your account receivables default.
Start by sending out monthly statements and invoices so your clients so they are reminded of the amount they owe your company. If your clients are behind on their payments for a long time, remind them of the penalty payments that have incurred.
Generate regular reports that allow you to assess the age of your receivables and indicate any bad debts that need to be written off.
Step Six: Outsourcing Accounts Receivable
This is where you contact us,Partners In Credit, experts at debt recovery. If your receivables are well over their due dates, outsource the accounts immediately.
In your credit policy, adding this step will establish a clear guideline of when you will resort to outsourcing your accounts to a debt collection agency, your expectations of them, and how you would monitor their performance.
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