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Laying the Groundwork
If you’ve assessed your cash flow needs and decided
that extending credit can be good for your business, you’re
ready to develop the credit policies and procedures that
are necessary for a successful small business.
Know the Laws
Before you start extending credit, familiarize yourself with
the various laws related to this subject. Obtain
copies of the Federal Government’s Bankruptcy
and Insolvency Act and the Consumer Protection
Act of your Provincial Government. Make sure
you understand how to protect your rights and how your
customers will protect theirs. Also obtain a copy
of the Collection Agencies Act to learn about
do's and don’ts of the collection process.
Get Organized
Whether it’s a department of one or 21, you should
dedicate staff to your credit function and assign responsibilities. Here’s what you’ll need to do:
- If you don’t have one, set up a computer-based accounts receivable
system. If you do, review it to see if it needs to be upgraded.
- Establish your credit policy including terms and criteria to help assess
a customer’s ability to pay.
- Identify a credit information provider and develop customer profiles.
- Establish a collection policy for initiating action on past due invoices.
Establish Your Credit Policy
Your credit policy guides employees who manage the credit process. You should evaluate the effectiveness of the policy on a regular basis and promptly communicate changes to employees. Your policy should cover:
- Circumstances under which you will extend credit
- How to assess the amount of credit to extend
- Available terms and conditions that may warrant a
change in terms
- Whether you offer discounts for early payment and/or
penalties for late payment
- When to initiate the collection plan
Develop a Credit Application Form
Experts recommend that the following information be included on your credit application
form:
- The company’s full legal name and address
- The form/type of business
- Length of time the company has been in business
- The company’s bank
- A list of the company’s suppliers for reference purposes
- A list of current assets (e.g., inventory, cash on hand, accounts/notes
receivable) and fixed assets (e.g., buildings, land, fixtures, equipment)
- A list of current liabilities (e.g., accounts/notes payable,
accrued taxes, payroll accrued) and long-term liabilities
- Value of leased machinery or equipment
- Net worth
- Most recent audit and dates of latest inventory counts
- Amount of insurance coverage (e.g., liability, fire)
Establish A Collection Plan
No matter how carefully you choose your credit customers, late payments will
sometimes be an issue. Be sure you have a system to flag aging receivables
that will put your collection plan in motion. And be certain your action
plan conforms to applicable credit laws.
Before you take action, ask your credit contact at the company
if there is a reason for the delay in payment. If your contact can’t shed light on the matter, address your correspondence to the person with the authority to pay. Here is suggested language for your notices:
5 to 7 Days Past Due – Send a Reminder.
Assume that the bill has simply been overlooked: “Your
payment of $100 has not yet been received. If you have
already sent your payment, please disregard this reminder. If
not, please remit promptly. Thank you.”
15 to 21 Days Past Due – Start a Conversation.
Be diplomatic: “Your payment of $100 is overdue. If
there is a problem, perhaps we can work out a payment plan. As
you know, we are unable to sell additional goods until the
overdue invoice has been paid. When can we expect your
payment?”
45 Days Past Due – Give a Deadline.
At 45 days if the invoice remains unpaid: “Your
account is overdue. You have not responded to our earlier
requests for payment. This is a final reminder. If
we do not receive payment within 7 days, we regret that it
will be necessary to take further action.”
60 Days Past Due – Make a Final Attempt.
Now it’s time to inform the customer that you have
engaged a collection agency: “We have made several
requests for payment on your past due invoice without a response. We
have referred this matter to a collection agency.”
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