How to Extend Credit to Customers and Collect Debts

As the operator of a small business, you must extend credit to customers on competitive terms so that sales will not be lost. At the same time, you must avoid long overdue accounts so that your capital will not be tied up and there will be less chance of accounts becoming uncollectible. If you manage your accounts receivable as suggested in this guide, you will realize the marketing advantages of credit extensions and avoid the common problems noted above.

This book has been designed to guide you in the management of your accounts receivable. In here, you will learn how to establish sound policies that will serve as guide­lines in granting credit. You will be shown collection techniques that will minimize uncollectible accounts and reduce the volume of past-due accounts so that your credit sales are more quickly converted to cash. You will learn how to analyze your accounts receivable to determine whether or not a problem exists, if corrective action is needed, or if reevaluation of your credit and collection policies is necessary. You will learn how to evaluate credit appli­cations so that many problems can be eliminated before they occur. You will learn how to initiate a collection program with all accounts, the delinquent and the not yet delinquent. You will learn how to follow up by mail and telephone to accelerate collections and the flow of cash to your business. You will learn when to resort to external resources such as collection agencies or the courts and how to use them to your advantage.

Benefits

If you apply the techniques you learn in this section to the management of your business, your dollars tied up in accounts receivable should be reduced, allowing for profitable appli­cation elsewhere. In addition, your credit losses should be reduced.

Extending Credit

Many potential credit problems can be eliminated before they happen through investigation and prudent judgment when granting credit to customers. The need for sound judgment is particularly critical since credit extension policies should be neither too liberal nor too restrictive. Overly liberal policies invite excessive receivables and uncol­lectible accounts while overly restrictive policies cause lost sales.

Investigation

Before you decide, get the facts. Thorough investigation of credit requests protects you from the fraudulent applicant who has no intention of paying as well as the applicant who is extremely slow in paying.

Credit Applications

The basic source of information for decisions on credit extensions is the credit application. There are three major factors to consider in evaluating a credit applicant. The first is the applicant's ability to pay, based upon income and obligations. The second is willingness to pay, which can be determined from the applicant's credit history. The third factor is potential profitability of the account. You stand to lose your cost of the product or service sold to the customer if you cannot collect an account. If your cost is relatively high compared to the selling price, then you have to be particularly care­ful in assessing credit risks.

Application Evaluation

Your evaluation of any credit application will depend upon a number of factors. In the case of an individual applicant, you will want to consider the following:

Employment history

Current position

Current income

Time on job

Job security

Monthly obligations (rent, loan payments, food, utilities, etc.)

Bank balances

Personal assets (house, cars, stocks, bonds, etc.)

Credit standing

Amount of credit desired

Information Verification

Information on credit applications must be verified to ensure that it is correct, current, and complete. A good place to begin is the place of employment to verify that the applicant is employed and that income and time on the job have been reported accurately.

Bank references should also be verified. While laws restrict the amount of information that banks can disclose, checking on this information can protect you from obvious fraud and may give you some indication of the applicant's ability to pay. Most banks will confirm the existence of an account and disclose a broad idea of the average balance. The bank may also indicate whether or not the account has been satisfactory.

Credit Bureaus

An important source of information for retail credit is the local credit bureau, which generally provides information on credit applicants to firms that are bureau members. Annual membership fees usually depend upon the size of the business.

Besides the membership fee, there is a nominal charge for each inquiry on a credit applicant. Your local credit bureau will provide you with details about services and costs.

Stability

In situations where the time or cost of a comprehensive credit check is prohibitive, professional credit managers have often found that a quick evaluation can be made based upon the applicant's stability. Stability is determined by the length of continuous employment and residence. This assumes that the person who has been employed for several years on the same job will most likely continue to be employed and therefore will be able to pay. Similarly, continuous residence indicates a desire to maintain standing in the community.

There are no hard and fast rules that can tell you who is a good credit risk and who is not. There are cases where the poorest of people pay their bills promptly, while the wealthy ignore them. As the owner of a small business, you must combine facts about the applicant with common sense to determine those risks that appear reasonable.

Commercial Credit

Commercial accounts should complete an application similar to that used for personal credit. Unlike individual credit applications, it is often difficult to verify information on income and expenses for businesses. It is also more difficult to make estimates of these factors for commercial accounts. There are situations where it may be reasonable to request a financial statement from the commercial account before extending credit, but these situations are not typical. Instead, you must rely more heavily upon references such as banks and suppliers with whom the applicant does business, the applicant's reputation in the industry, identity of officers, and so on.

The application should note the names of individuals who are authorized to purchase for the account so that fraudulent purchases can be detected. There should also be an indication of purchase order requirements so that you will be protected in the event of an unauthorized purchase.

Frequently, the commercial applicant with a marginal credit rating will list only those suppliers with whom a satisfactory relationship has been maintained. However, you can often use your own judgment and knowledge of your industry and locale to determine other suppliers with whom the applicant may have done business. If there is any doubt in your mind as to the credit worthiness of the applicant, it is always a good idea to contact these other sources to find out what their experience has been.

Compare your financial plan occasionally with real operations statistics. With effective records you can do this. Then, where
discrepancies appear it is possible to take corrective actions before it's too late. The right decisions for the ideal corrective
action will depend upon your knowledge of management techniques in buying, pricing, selling, selecting and training staff, and
tackling other management issues.

You probably are thinking you are able to hire a bookkeeper or an Accountant to deal with the record keeping for you. Yes, you
can. But remember two very important facts:

1. Provide the accountant with accurate input. Should you buy something And do not record the amount in your business checkbook,
the accountant can't enter it. If you sell something for money and do not record it, then the accountant will not understand about
it. The records the accountant prepares will probably be no greater than the info you provide.

2. Use the documents to make decisions. If you went to a doctor And he told you you were ill and needed certain medicine to get
well, you'd follow his advice. Should you pay an accountant and he tells you that your earnings are down this season, don't hide
your head in the sand and pretend the problem will go off. It won't.

Business Management Roll in Personnel Selection. If your business Will be large enough to require outside assistance, an important
responsibility will be the choice and training of one or more employees. You may begin with relatives or business partners that
will assist you. But if the company grows - as you hope it will - the time will come when you must select and train personnel.

Careful choice of personnel is essential. To select the right Employees decide beforehand what you need each one to perform.

Then look for applicants to fill these particular needs. In a small Business you may need flexible employees who can shift from
task to task as needed. Include this in the description of all those tasks you would like to fill. At the exact same time, look
ahead and plan your hiring to guarantee an organization of individuals capable of performing every crucial function. In a retail
store, a salesperson may likewise do stock-keeping or bookkeeping at the outset, but as the business grows you'll need sales
people, stock-keepers and bookkeepers.

Once the job descriptions are composed, line up applicants from whom To make a choice. Don't be swayed by clients who may suggest
relatives. In the event the applicant does not succeed, you might lose a client as well as an employee. Some sources of potential
new employees are:

1. Recommendations by friends, business acquaintances. 2. Employment agencies. 3. Placement bureaus of high schools, business
schools, and schools. 4. Trade and industrial associations. 5. Help-wanted advertisements in neighborhood newspapers.

Your next task is to screen want ad responses and/or program Forms delivered by employment agencies. Some applicants will be
removed sight unseen. For every one of the other people, the application form or letter will serve as a basis for the interview
which should be conducted privately. Put the applicant at ease by describing your company generally and the occupation
particularly. As soon as you have done this, encourage the applicant to speak. Picking the right person is extremely important.
Ask your questions carefully to learn everything about the applicant that's pertinent to the job.

References are crucial, and should be assessed prior to making a final decision. Check through a personal visit or a phone call
directly to the applicant's immediate former supervisor, if possible. Verify that the information given you is accurate. Consider,
with conclusion, any negative comments you hear and what is not said.

Checking references may bring to light significant information Which may help save you money and future annoyance.

Personnel Training. A well-selected employee is only a potential Asset to your business. Whether or not he or she becomes a true
advantage is dependent on your training. Recall:

To allow sufficient time for instruction. Not to expect too much from The trainee in too brief a time. To let the employee learn
by performing under real working conditions, together with close oversight. To follow up on your training.

Check the employee's operation after he or she was at work For a time. Re-explain key points and short cuts; bring the employee
current on new developments and invite inquiries. Training is an ongoing process which becomes excruciating supervision.

Personnel Supervision. Supervision is the next essential of personnel control. Fantastic supervision will lessen the cost of
operating your company by cutting back on the amount of worker errors. If errors are corrected early, workers will find more
satisfaction out of their tasks and perform better.

Motivating Employees. Small businesses occasionally face special Issues in motivating employees. In a large business, a good
employee can see An chance to progress into management. In a small business, you are the management. 1 thing you may wish to Think
about is to give good workers a Small share of their profits, either via part-ownership or even a profit-sharing plan. Someone who
has a"share of the activity" will be more Concerned about helping to make a success of the business.

general-contractor general-store gentlemen-club gift-card gift-shop gin glamping glass glitter gluta-drip go-cart gold government-contracting gown-rental gps-tracking grass-cutting greenhouse grillz gun-range gutter-cleaning gym-apparel hair-extension handbag handyman hardware-store hat hauling headband headphone healing healthcare health-coaching Healthcare Heat Press Heel Home Health Care home-improvement home-inspection home-inspection hoodie horse-breeding hostel hot-dog-cart house-painting hr-consulting htv hub human-hair hunting-outfitter hvac hydro-dipping hypebeast hypnotherapy ice-cream-roll ice-cream-truck