Many businesses sell on credit to their customers. The sales cycle is never complete until the customer pays for the goods or services supplied. The business needs to be aware of and establish mechanisms for managing the arising credit risk. Credit risk is the risk that the customer defaults and fails to make payment. Below are some useful, practical considerations which can help you successfully collect on all credit sales and hence improve business cash flow while avoiding loss.
Know that you are in the banking business when you make sales on credit. How easy is it for you to obtain a credit facility from your bank? Just like banks, have a proper credit application, vetting and approval process to ensure credit is extended to credit-worthy customers only. Remember, it is better not to make the sale than to sell and fail to collect.
Credit period should be agreed upon with clear consequences for exceeding; such as stop supplies and interest charge on outstanding amount.
To have a positive cash flow, you need to collect at a faster rate than the rate at which you pay. Ensure therefore that the credit period extended to customers is shorter than the credit period extended to you by your suppliers.
Have in place a system of ensuring that all sales are invoiced promptly. Do not be the source of any delays in receiving payment.
Understand your customers’ payment cycles and align your billing to it. If a customer, for example, pays invoices received in a particular month at the end of the following month, ensure all invoices are with the customer by the end of the month. Delay by a day could mean being paid in 60 days instead of in 30 days.
Make your sales representatives primarily responsible for collection from their customers. Commissions, if any, should be payable only when payment is received
Have proper and accurate records of amounts due from customers and their aging. This helps in monitoring and taking prompt remedial action where necessary.
Make a habit of sending regular monthly statements to your customers. This prompts payment and also helps in early detection and resolution of disputed amounts.
Lastly, have a good debt collector to assist the business in collecting delinquent debts.
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