CAT / FIA FFM Syllabus F. Credit Management - Debt collection - Notes ^{1 / 7}

A company must have in place a clear policy on the collection of debts

Even if a good screening/assessment procedure is in place for accepting and reviewing customers, late payments are a fact of life and must be handled pro-actively.

Much time can be spent in chasing late payments and if this process is not well-organised, management may come to the conclusion that it is not worthwhile.

This is especially true in cases where a company is growing very quickly and celebrates the signing of contracts and issuance of invoices as signs of success.

If, however, these invoices are not collected in due time (or at all), then the company is throwing away the rewards of “success”.

A company managing its receivables diligently will have the following:

1. A monitoring system that clearly “flags” late payers, known as an aging system.

2. A follow-up system that assigns responsibility to specific staff doing the follow-up; this includes an elevating of difficult cases to more senior and/or more experienced staff to handle;

3. Training for staff involved in handing follow-ups, whether performed by phone, mail or personal visits;

4. A policy determining when to involve refer the case to lawyers (preferably in-house, for cost reasons) in preparation of follow-up letters. An external lawyer may carry more weight, but is also more costly;

5. Use of a collection agent to chase the receivable. Here again, a company must calculate the costs and benefits of involving an external agent. In such an analysis, the savings of management time (opportunity cost) is the most difficult to estimate.

Collecting debts

A company should have procedures for ensuring that overdue debts and slow payers are dealt with effectively.
 
The earlier customers pay, the better. 

Early payment can be encouraged by good administration and by discount policies. 

The risk that some customers will never pay can be partly guarded against by insurance.

Collecting debts is a two-stage process:

1. Task of receivables ledger staff

   Having agreed credit terms with a customer, a business should issue an invoice and expect to receive payment when it is due. 

   Issuing invoices and receiving payments is the task of receivables ledger staff. 

   They should ensure that:

   (i) The customer is fully aware of the terms.
   (ii) The invoice is correctly drawn up.

2. Task of credit control staff

   Chasing late payers might be a responsibility of credit control staff. 

   In the case of very late payers, the services of an external debt collection agency might be employed. 

   Procedures for pursuing overdue debts must be established, for example:

   (i) Issuing reminders or final demands
   (ii) Chasing payment by telephone
   (iii) Making a personal approach for payment from the credit manager
   (iv) Notifying the debt collection section about what debts are overdue so that further credit will not be given to the customer until he has paid the due amounts
   (v) Getting a legal help to recover a debt