What Should We Do
– Part I
Written by Andy Li CM MCCMA
For preventing the cost of slow payment and bad debt, we should maintain a comprehensively credit control. A comprehensively credit control should include:
- Goals;
- Accountability;
- Terms and conditions of sales;
- Credit approval procedure;
- Monitoring and reporting procedure;
- Training.
Goals
The enterprise should be an up the goal for their credit control. It should be better if have two or three good goals and achieve them rather than put up a long list and miss most of them. Before set up the goal, we should review the current account receivable situation, for example:
The current situation of ABC Company Limited as showed:
| Current | $885,000.00 | 59% |
| 0-30 days | $225,000.00 | 15% |
| 31-60 days | $150,000.00 | 10% |
| 61-90 days | $120,000.00 | 8% |
| 91-180 days | $60,000.00 | 4% |
| 181-365 days | $45,000.00 | 3% |
| Over 365 days | $15,000.00 | 1% |
| Total | 1,500,000.00 | 100% |
DSO is 28.5 days; bad debt written off is 2% of annual turnover.
The goal of ABC Company Limited may be:
- Achieve a DSO of less than 27 days in the first quarter;
- Reduce bad debt write-offs to 1% of annual turnover;
- Deduct 3% pass due in the column 61-90 days, 4% pass due in the column 31-60 days and 7% pass due in the column 0-30 days.
Accountability
The enterprise should state clear the responsibility and authority to each related personnel. For example:
Position |
Approval Limitation |
Credit Clerk / Assistant |
Up to HK$10,000.00 |
Credit Supervisor |
Up to HK$50,000.00 |
Credit Manager |
Up to HK$100,000.00 |
Credit Director |
Over HK$100,000.00 |
Terms and conditions of sales
We should state clearly the standard terms and conditions that will offer to the client, such as 2% 10 Net 30. The policy will state whether these terms can be negotiable, if yes, it is necessary to clearly state who have authority for accepting the negotiated terms. When drafting this section, we should state clear:
Detail terms and conditions of sale;
- What means of “past due”;
- The point of title transfer;
- The terms and calculation of pass due interest;
- The terms of acceptable guarantees;
- The terms and procedures for restocking; and
- The collection and legal charges if they will be transferred to the customer.
Credit approval procedure
This section is combined from two parts:
- New application; and
- Increase credit limit for existing client.
Before writing this section, we should be considers:
- Do we use an external credit agency to evaluate new customers? If so, then for what amount?
- Do we use a Credit Application Form for all new application?
- Do we require bank reference?
- Do we require guarantee?
The sample Credit Application Form was presented here for your reference.
Monitoring and reporting procedure
This section will state clear the time line for the daily credit control activities such as schedule for monthly AR review meeting, performance review for the existing customer, the frequency of AR aging report and collection report generation, who should receive the reports etc.
Training
Provide training to the related personnel for updating their collection skill and related ordinance.
