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Credit Policy: A Road To Higher Profits
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By Small Business Advisor

The Small Business Advisor interviewed Robert Anderson, partner in charge of credit of a small company.

A sale is not a sale until the account receivable is collected. Customers routinely seek the best terms possible, often attempting to postpone payment for as long as possible. Unfortunately, delinquent payments hurt your cash flow and sometimes result in write-offs. Write-offs decrease the company's profit by the cost of money, material, supplies, production costs and other direct expenses incurred to make the sale.

A good credit policy sets terms that limit losses, but does not discourage sales. Bad debts are a natural part of doing business and a certain amount of losses may make good business sense, because to grow your business, you may have to take some credit-risk. Of course, too many write-offs will hurt your company. A company that has a day's sales outstanding that is low by industry standards is often foregoing sales.

Liberalizing credit terms has a predictable and often positive affect on cash flow, sales and earnings.

Establish a consistent and complete program for the credit/collection department. Make sure that credit files are kept current, especially the billing address, and that the name of the contact person is clear. Habitual slow payers and new customers should be clearly delineated. Carefully check the credit rating of new customers and monitor their account closely until they demonstrate that they pay on time. If a particular customer appears marginal in terms of payment ability, have an order acknowledged by a responsible party of the customer acknowledge the order and the sales terms.

Offering dating (time for payment) on an invoice does give a customer more time to pay. But make sure that the customer commits to make the payment on a specific future date. Although the arrangement is an unsecured debt and offers the customer more time to assemble funds and make plans to pay the invoice, it is imperative that the customer lives up to the agreed upon date. Steps should be taken to focus on that time frame and make sure that that date is not a stepping stone
to additional time.

There is absolutely no harm that can accrue from asking for a deposit and it is unusual that a sale is lost because of such a request.


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