Page 498 - Business Principles and Management

Chapter 18 • Credit and Insurance

COLLECTION PROCEDURES
Once a business establishes a credit system, it must decide how to collect money
owed by customers. This is an important function, because it affects the health of
the firm. Managers try to meet two objectives when establishing collection proce-
dures: (1) collect the amount due and (2) retain the goodwill of the customer.
Most credit customers pay their bills, but some will always be a few days
late. Communicating and enforcing a policy that interest is added to the cus-
tomer’s account for every day the payment is late will encourage prompt pay-
ment. The usual collection procedures include sending a statement at the end of
the billing period, followed by reminders at 15-day intervals if the bill is not
paid. Businesses often use letters and duplicate copies of invoices with printed
stickers on them to remind customers that their accounts are overdue. Those are
followed by telephone calls to discuss the reason for late payment and to negoti-
ate an alternative payment plan. All collection steps should be done profession-
ally, with the goal of retaining the customer if payment is made. After 60 to 90
days, if it appears that the customer is not going to send payment or agree to a
payment plan, the final collection step is usually either to turn the account over
to a collection agency or to bring legal proceedings against the customer. With
installment credit, the business may have to repossess the merchandise that was
sold on credit. These actions are a last resort but must be taken unless the
amount due is so small it is not worth the cost of those actions.
During the collection process, businesses should try to find out why cus-
tomers are not paying their overdue accounts. Most people are honest and plan
to pay. Besides, it is better for the business to get paid late than not at all. There-
fore, it is important to learn why an account is overdue and work out a revised
payment schedule that the customer can meet.
Part of the reason for overdue accounts may be that the business extends too
much credit too easily. Overextension of credit is as much the seller’s fault as it
is the buyer’s. Too often, businesses issue credit cards to unqualified applicants
who sometimes get carried away by their new purchasing power. When they fall
behind in their payments, some get new credit cards to pay off overdue balances
on other cards. But more cards only get the customers into further debt trouble.
Young people are often poor credit risks because they are inexperienced in man-
aging money. Older people also experience credit difficulties when they lose
their jobs, are involved in an accident or a lawsuit, or continue to add small
amounts of debt without considering the overall amount they owe.
Collecting bad accounts is time-consuming and costly. It is always better to
spend the time developing effective credit policies and screening credit applicants
before credit is extended than having to work to collect accounts that are not paid.

CHECKPOINT
What is the last step in the collection process?

Analyzing Credit Sales

It is important for every business to watch its accounts receivable (the debts or
money owed to the business), so that the total does not grow out of proportion
to the amount of credit sales. For example, if credit sales are not increasing but

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