Question

unit 7 uncollectibles

What are some factors a company has to take into consideration when extending credit to a customer? What are some best practices for a small company when extended credit to customers?

Answer 1

FACTORS A COMPANY TO BE CONSIDERED WHEN EXTENDING CREDIT TO A CUSTOMER:

Doing business today can be quite tough due to reasons ranging from lack of customers to competition from other business that deals with similar products or services as you.

Small and large businesses are all on the look out to try as much as they can to increase sales and maximize profits.

Giving out credit to customers is an ideal way to increase sales as well as create a good relation between you and the customer.

Businesses that offer credit services to their customers have recorded increase in sales of up to 50 percent. This means that the customer can take goods and pay on a later date as agreed.

FACTORS ARE

1)Financial capability :

• Before giving out credit to you customers, you should be able to know the amount of risk your business is willing to take and handle when issuing out credit your customers.
• Ensure that your business is stable enough to take up such a transaction; this is because most credit offered to customers usually end up being unpaid resulting to losses or even closer to businesses.

2)Credit terms:

• Make an agreement with you customer about the amount you are willing to spend, and the duration it is going to take for it to be paid back.
• Gauge the amount you are willing to give out and ensure it won’t stall the normal flow of business until you get paid. Credit can take between 5 days to several months as agreed upon by both parties.

3) Credit qualification:

• Before extending credit to customers, it is essential that you determine their creditworthiness.
• This is important because it increases the chances of you getting back the money that you have issued out as a credit to the customers as credit. Start by running a background check on them.
• Request for simple things like credit application references or run a check with consumer credit agency to pull out important information concerning your customer

4) Credit policy:

• Create a credit policy that pulls all the process of applying, issuing, submission and collection of all credit related activities so as to be able to plan ahead.
• This will save you time, and other hustles as everything will be clearly drafted.
• This can be done by a hired skilled personnel or use the available staff you already have from an accountant to bookkeepers to help with all the processes

5) Credit review:

• Keep a track record of customers and the amount you offer them regarding credit and review them later.
• This will guide you when intending to increase the amount of credit, which you are willing to give out to your customers, as well as monitoring customers that pay up on time to increase their level of credit upon their request.

BEST PRACTICES FOR EXTENDING CREDIT:

• The credit industry is constantly evolving. With the advent of new technological advances, the abilities of credit professionals are extended.
• Instead of manually searching for information on businesses, credit managers can focus more on the overall credit process, what is working and what they could be doing to improve it.

1)CENTRALIZE:

• Your credit team should be fully dedicated to the work in their work in the credit department.
• Tasks concerning the credit department shouldn’t be placed throughout the business, such as sales representatives being responsible to check the credit on their possible new sales.
• With all the other jobs a sales person is working on, this creates the possibility that checking credit will be overlooked.
• Your credit team should be fully responsible for all credit related tasks to ensure you have transparency into all decisions being made

2) SPECIALIZATION:

• Often times the credit department is lumped in with collections, as people refer to it as “credit and collections”.
• Although credit and collections do go hand in hand, since a customer’s credit worthiness can effect whether you ever collect from them, credit and collections are two wholly different tasks.

3) FOCUS ON THE CUSTOMER:

• Ultimately, your customers are the most important part of the credit process.
• Treating your customers well can determine whether you collect from them in the end.
• Your credit team should make clear to each customer who their main point of contact. In addition, each industry that your customer is in can make a difference in what type of credit terms are extending.
• Your credit team should be familiar with each industry and what the best practices are for each.

4) USE TECHNOLOGY:

• Credit focused technology allows your team to focus on the most important part of their activities – deciding who should receive credit terms and what they look like.
• They shouldn’t be bogged down with manual tasks

thank you

all the best