Patty League
Collection procedures entail critical steps that a company must follow to guarantee that payments are made on a timely basis. These important procedures vary from business to business and are fundamental to ensuring profits for your company.
If you don’t have a credit and collections policy, you need one. It is crucial that your company have a uniform credit policy rather than make customer-by-customer credit decisions. Sometimes you may stray from your policy for sound business reasons. But a uniform company policy is essential to successfully collecting your receivables.
A few of the basic questions you should consider before setting the policy are:
- Which types of credit do you want to offer?
- To whom do you want to offer credit?
- How much credit do you want to offer?
The accounting department is usually in charge of credit policy compliance decisions because collections directly impact the business’s bottom line. While sales teams are essential to a company’s success, there is often tension between the sales goals placed on the sales team and the credit policies of the company. For instance, a salesperson may communicate alternative credit terms to a potential customer—different from the company’s existing policy. If a salesperson does not inform the accounting department about the changes in credit terms offered, it could ultimately cost the company thousands of dollars.
Without a doubt, as long as a company is being paid by a new client, no one, including those in the accounting department, are aware there is an issue. However, as soon as the new client does not pay, the decision by the salesperson may result in a significant loss for the company.
Continuing Personal Guarantee
Additionally, a company should always secure a continuing personal guarantee. These are essential. A personal guarantee does not need to be obtained from a sole proprietor, as he/she is personally liable for monies owed to a company. Although a personal guarantee can be signed at any time during the relationship with a customer, the best practice is to secure a personal guarantee early on. Once a customer is behind on payments and it appears the company is not going to be paid, the chances of obtaining that personal guarantee are slim.
Your credit policy is mechanism to help ensure that you are paid by your customers. It provides a method for determining how you are going to collect payment. It doesn’t have to be rocket science, but it does have to be planned out.
