Managing Accounts Receivable and Debt Collection
By developing a credit policy and informing their customers about its stipulations, entrepreneurs should be able to protect their businesses from financial catastrophes.
Managing accounts receivable and debt collections are challenging areas to navigate as a business owner. Though customers are no doubt happy to receive financing, they may find it difficult to pay off their debts. To avoid possible confusion, financial mishaps, or even legal issues, business owners should establish a credit policy and make sure that their customers and employees are aware of its contents. Truly, offering both cash and credit payment options will help increase revenue and widen the potential customer pool.
Success is never guaranteed, but by arming themselves with the proper tools, entrepreneurs can increase their chances of achieving success. Indeed, to protect their business, entrepreneurs should develop a sound credit policy, maintain a steady stream of communication with their customers, educate their employees about credit approval applications, and utilize the newest technologies and services to record all financial transactions. Being an entrepreneur is by no means easy, but if you put in the necessary work, you will be able to save your business from financial ruin.
Managing accounts receivable and debt collections can be challenging areas for management. Customers are often delighted to receive financing but sometimes find it difficult to honor their financial obligations. When customers are unable to find the cash to make purchases, they sometimes buy products on credit. When customers have the cash to settle their outstanding debts, they sometimes find other uses for the money.
Some organizations only offer cash sales. To be competitive, they may introduce credit sales and from that time onwards, they experience increased revenues. Credit sales often attract additional customers. However, not every customer who approaches an organization for credit will receive it.
Organizations that want to offer credit sales must establish a credit policy. Credit policy provides clear guidance on who, when, and how much credit can be offered. Criteria for eligible customers also has to be established. All employees who are operating in the credit department will know the requirements when reviewing and approving credit for potential customers.
Customers (either individuals or organizations) who need credit must provide certain documents that must be carefully reviewed, and only if the customer meets the organization’s requirements will their credit will be approved. Credit scoring must be established and customers must be provided credit based on the points they gained through the credit score.
Following through with credit customers to ensure that they settle their balances can be time consuming and require a great deal of effort from management. Many organizations that offer credit to customers have established credit departments to approve customers’ credit, bill the customers, and ensure that they repay their balances. Organizations will sometimes have to take legal action against customers to get them to repay their outstanding balances.
Customers may be required to put down a deposit before their credit can be approved. The amount of the deposit varies based on whether they are first-time or repeat customers. The amount of the credit extended may also impact the amount of the deposits customers are required to make.
The organization must provide clear guidance on the levels of credit approval for the employees who will be approving credit applications. The duration of credit offered to customers must also be documented and communicated to the employees who are responsible for approving customer credit.
Credit sales impact the accounts receivable balance. Many organizations have an accounts receivable module, which forms part of their integrated information systems, to track each customer’s details. If management recognizes that customers are not settling their balances promptly, they will have to make provisions for the amounts that have exceeded the due dates. The debt collection unit must follow through with customers regularly to get them to settle their balances as soon as possible.
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