Accounts Receivable – Tenets of a Collection Policy
Written by the Controller | CFO Advisor Team
It is not a stretch to say “improving our accounts receivable collections will improve our company’s cash position”. However, the accounts receivable collection process is often overlooked and sometimes not a primary responsibility assigned to someone in the organization. A proper policy starts before you accept a new customer. Consider the example below.
- Assume: $500 debt is uncollectible; net profit after tax is 5%
- Question: How much in sales would you need to produce to make up for the $500 bad debt?
- Answer: $500/.05 = $10,000
Is there a cost benefit to accounts receivable management? The benefits that may accrue from the collection plan can be measured. For example if a company has average daily cash collections of $20,000 and is able to improve its collections by 5 days; the company has freed $100,000. At 10% financing costs the company will save $10,000 annually.
Properly monitoring and control of your accounts receivable balances starts with a written documentation of the policies and procedures. The Key - Don’t Fall Asleep!
See the following provisions of a sample policy.
SALES TERMS
The Company will offer terms of Net 30 days to qualified applicants. Requests for special terms must be documented and approved in advance by the President.
LATE PAYMENT PENALTIES
Payments made beyond 30 days will be subject to a 1-1/2% late payment charge per month. These terms must be clearly stated on all the Company’s quotations.
OBTAINING CREDIT INFORMATION
The level of credit information to be obtained for each account will be based on the President’s discretion.
EVALUATING CREDIT INFORMATION
Credit decisions will be based primarily on the credit applicant’s willingness to pay (as evidenced by its payment history) and ability to pay (as evidenced by its financial situation). Other factors relating to the applicant – its legal form, the industry in which it operates and years in existence – will also be considered.
ASSIGNING AND APPROVING CREDIT LIMITS
Credit limits will be based on each applicant’s credit rating and expected volume of purchases. In certain situations, cash will be demanded in advance. The President will set credit limits.
REEVALUATING CREDIT TO EXISTING CUSTOMER
Credit reevaluations will be performed on all major accounts regularly. Reevaluations will also be performed on any accounts when payment activity or other circumstances indicate a need.
COLLECTING PAST DUE ACCOUNTS/ACCOUNTING PERSONNEL
Phone calls – the primary method used to collect past due accounts – will be placed to customers when a balance is between 1 to 30 days beyond our terms.
COLLECTING PAST DUE ACCOUNTS/ SALES REP
Sales Rep will be notified on a weekly basis of all accounts that are 31 to 60 days beyond our terms. The Sales Rep will place phone calls to the account in an effort to collect payment.
COLLECTING PAST DUE ACCOUNTS/PRESIDENT
The President will be notified on a weekly basis, of all account balances that are over 61 days past due. The President and the Sales Rep will discuss resolution of the past due balance. Resolution may include one or more of the following:
- Continue collection efforts for a set period of days
- Submit to outside collection agency
- Enforce late payment penalties
- Write-off account balance
RECORD KEEPING
Customer files will be kept for each customer. Included in the files will be all of the documents relating to the credit approval and credit management process. The records for customers with no activity for over one year will be moved to storage.
The BIK Controller|CFO Advisors:
Tony Battaglia
Tim Beck
Al Knox
Larry Schmitt
Together we can perform a variety of accounting and financial services to help your business run more efficiently and economically. Our objective will be to improve your bottom line through better processes and procedures. Contact us today at cfoservices@bikcpa.com or call 847-281-3209.
Visit our web-site at www.bikcfoservices.com.