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How do I improve my credit management?


Extending credit to your customers can be risky, but often it would be impractical not to offer credit. If customer expectations or the nature of your business compel you to sell on credit, you need to manage the risks. 

Customers who pay late (or not at all) cost you money by crimping your cash flow and directing your time towards collections rather than making more sales. Ideally, the cost of un-collectable bills should not be a significant cost of doing business. 

According to the American Collectors Association, bad debt should amount to no more than 5% of your gross profitósometimes even less, depending on your type of business. To keep your losses to a minimum and speed up the collection process, you need to take the following actions:

  • extend credit sensibly
  • keep an eye on your accounts receivable
  • collect overdue bills promptly

Increases in the availability of credit are making it easier and easier for many people to get into debt over their heads. In 1998, one in twelve Americans filed for bankruptcy, and consumer debt is still on the rise. In some industries, small business debt is as high as 70% of net worth. Now more than ever it is important to protect your business from the costs of late and unpaid bills. 

How can a credit policy help? 

The only surefire way to avoid collection hassles is to collect in full at the time of sale. If you would like to extend credit, you can prevent many potential delinquencies by establishing an effective credit policy. A good credit policy spells out the agreement between your company and the customer. It is your job to make sure the customer understands and agrees to your policy at the time of the sale. 

An important part of any credit policy is to identify the risk level of a customer  both good and bad credit risk levels. Identifying bad credit risk prospects or customers allows you to limit or avoid potential accounts receivable problems and bad debt. Identifying good credit risk prospects and customers could identify opportunities where you can afford to offer better pricing or terms - enabling you to win business which you otherwise may have lost to competitors. 

Your credit policy should be easy for your customers to understand and simple for you to manage. It should help you identify good and bad credit risks up front and protect both you and your customers from miscommunications. Used consistently, a well-conceived credit policy helps you win good customers and avoid the time, cost and frustration of handling late paying customers 

Track what you're owed 

In accounting terms, invoices that have been sent but not yet paid are known as accounts receivable (A/R). Actively managing your accounts receivable can help you get paid faster. Good accounts receivable management starts at or before the time of the sale by the establishment and communication of your credit policy, and lasts until you collect the money you're owed. 

Collect overdue bills 

Acting promptly and decisively is the key to successfully collecting overdue bills. In general, the longer a bill has been outstanding, the harder it is to collect.

A strategy for dealing with past due accounts can simplify collections and help you get paid sooner, and itís easier and less time-consuming than dealing with past due accounts on a case-by-case basis. Use the sample policy  as a guideline for creating your own. Refer to your policy and act on it when reviewing your A/R Aging Report. 

Your policy might have a longer time scale or fewer steps, depending on what's common in your industry. Whatever your plan, you should follow up with late paying customers quickly and repeatedly. In general, the sooner you contact a delinquent customer, the more likely you are to get paid. Use an escalating scale; begin with a friendly attitude and become gradually more insistent and formal in communicating that the customer pays the overdue bills. 

Avoid high-cost, low-return collections. Consider the likelihood of recovering the money owed to you, the total amount due, and how much it will cost in payroll and materials to make the money materialize. The best way to reduce these costs is preventative: be proactive by setting up a clear credit policy and using it consistently. 

Itís a good idea to keep a record of accounts receivable history, including the actions youíve taken to collect on a bill. Note when you took the action and the result or customer response. Such a record can support your claims in the event of a lawsuit. But more importantly, it aids your memory and helps you communicate with your customer about the details of their case. If you have more than one overdue account at once, this can be essential to avoid confusion. 



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