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Debt recovery is an important function in companies. Very few companies can function properly on cash business or without obtaining credit from financial institutions.

Companies that do not give or take credits are usually very small in size and have limitation in expanding. Although offering credit terms to customers is tantamount to expansion and acquiring big customers, there is always an element of risk involved. Therefore, many companies implement strict credit policies to minimise their credit loss arises from bad debts.

A good Credit Policy covers all aspect of the business transactions ranging from review of potential customer’s creditability to ascertaining the amount and duration of credit terms. No matter how good and solid is a credit policy there is no way that it can eliminate credit loss totally. However, a good and effective credit policy could helps to determine calculated loss and minimise its impact to the business.

In order to make a good judgement on the customer’s credit worthiness, it is important to take note of the following points:

1.  The company must have a good track records of sales achievement.

2.  The sales and profit must be on a gradual increase year by year. A gradual declining sales and profit is a bad indicator of the company’s future performance. Also look out for sudden dip or surge in sales and profit without justifiable reasons.

3.  A good cash flow management is important to ensure the company’s on-going concern. Ensure that the company practises that.

4.  The company should have a positive Total Assets less Total Liabilities position which is equivalent to the Net Equity position. A negative position means that the company is in serious financial status or insolvent.

5.  The company practises good debt recovery procedures and a credit policy.

Credit Management Procedure.

A good credit management procedure is pertinent to ensure an effective credit policy. The procedure forms the basis on how to determine the potential customer’s credit worthiness and what amount of credit and terms to give. It also covers how the company would monitors and manages its trade debtors. The following are some important actions to take and consider when managing your trade debtors:

1.  Perform credit evaluation if new and exiting customers regularly.

2.  Assign credit limit to each of your customers. Avoid giving unlimited credits.

3.  Set clear payment terms with your customers. Ensure that they are aware of the credit terms and practised within them.

4.  Ensure that your invoices and monthly statements are accurate and sent to your customers promptly.

5.  Ensure you have the supporting documents for all unpaid amounts readily available.

6.  Perform periodical follow up on outstanding invoices or balances.

7.  Keep records of all telephone conversations and corresponding letters to and from customers.

8.  Do be afraid to consider legal actions if if you feel payment is not forthcoming.

9.  Get customers to provide written acknowledgement on big invoices or big amount owing.

There is no use making a lot of sales if you cannot collect the money. Giving too much credit and too long credit term can hurt your cashflow. It is better to reject a big business deals if there is a potential credit risk involved. A company cannot survive without strong cashflow. Therefore a good and effective debt recovery and credit management procedures would stabilized the company’s cashflow and ensure on-going business concern.