Chapter 16 Flashcards
Settlement discounts
Settlement discounts (also called “cash” discounts) are influenced largely by accepted practice within the industry
The settlement discount policy must be enforced, since some customers will attempt to take the settlement discount whether they pay on time. The settlement discount policy must therefore be formal, in writing, dated and quantified.
Setting credit terms
Once the credit limit is reached it cannot be exceeded without the authorisation of senior management.
Credit customers should be informed in writing of:
the normal credit period (e.g. 30 days after the invoice date);
any discount for prompt payment (e.g. 2.5% of the invoice amount for payment within seven working days of the invoice date);
any interest that will be charged on late payment.
Useful reports to help monitor accounts receivable are
An aged receivables list detailing the length of time outstanding amounts have been owed. It is useful because it highlights breaches of credit terms and where debt collection procedures need to be implemented.
A credit utilisation report showing the proportion of each customer’s credit limit that is currently being utilised. It identifies credit limits that may need to be reviewed and revised (upwards or downwards) as well as breaches of credit limit
Ways a company can assess credit worthiness
A bank reference, which is relatively easy to obtain. However, as the other company is the bank’s customer, any reference will stick strictly to the facts and is unlikely to raise any concerns.
A trade reference from another company who has dealings with the (potential) customer. Although another company may be reluctant to give a written reference (in case of dispute), contacts in the trade may provide an informal, oral reference.
Credit rating/reference agencies are professional businesses which sell information about companies and individuals. They will be keen to provide the best possible information, so the company is more likely to return and use their services again.
Latest available financial statements can be quickly and easily obtained. Although an analysis may indicate whether a company should be granted credit terms, the financial statements will be out of date to a greater or lesser extent. Quarterly interim financial statements can generally be found on the websites of listed companies, however. Liquidity ratios can be calculated.
Information from financial media including national and local press, suitable trade journals and the internet. For example, if a large contract has been lost or one or more directors have left recently, the company may have problems,
A visit, not only to discuss their exact needs and impress them with good customer service, but to “get a feel” for whether the business should be given credit.
Method to help a customer pay on a timely basis
Monthly statements − produced quickly and easily by any computerised sales ledger system and sent to customers. Including a “tear-off” remittance advice may help make payments quick and simple for some customers.
Chasing letters − directed to a specific person preferably at a reasonably senior level. However, preparing and sending reminders and final demands has a cost and their impact may be limited.
Chasing phone calls − may be harder for the customer to ignore than chasing letters. A credit controller who regularly contacts a suitably senior person and politely, but firmly, demands payment for overdue amounts can often achieve good results.
Personal approach − from a senior person in the organisation to a senior person at the customer can often yield results. This is quite common in professional accountancy and legal firms where a partner “has a word” with a client’s CEO.
Stopping supplies − this may be a powerful tool if, in the short term, the customer depends on the organisation’s goods or services. However, in the longer term, the customer may source an alternative supplier.
Legal action − although debt recovery through courts may not be costly in terms of fees (e.g. fees to lodge a claim in a UK court are generally around 5-15%), the process can be time consuming (and likely to lead to the loss of the customer). However, just one letter from a solicitor can often be sufficient to obtain payment for fear of further legal action.
External debt collection (“credit management”) agency − fees can be high but many agencies operate on a “no win, no fee” basis. So although the customer will invariably be lost (if not already), any recovery is preferable to write off.
Invoice discounting
the selling of selected sales invoices to a third party for a discounted cash sum, while retaining full control over the receivables ledger.
