There
are many ways to make your business more profitable, and sound credit policies
are high on the list. The current slowdown in the economy is a good reason to
reexamine your company's policies. Keep the following items in mind as you
review your policies.
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Don't be so eager to sign on new customers that you neglect to check out their
credit history. Take the time to check references, and obtain a credit report
to see how they've handled other financial transactions.
*
Establish collection policies and follow up promptly on delinquent accounts.
The more overdue accounts become, the more likely they are to become
uncollectable. That cuts into your profits.
*
Calculate what it costs to carry credit for your customers. For example, if
your business generates $1,000 per day in credit sales, and it takes you an
average of 60 days to collect, your cost of providing credit to your customers
is $3,000 per year. This example assumes you can borrow money at 5% interest.
By speeding up the average collection to 30 days, you cut your carrying costs
by half.
*
To speed collections, invoice customers when you ship the goods; don't wait
until the end of the month. Make sure your invoice clearly shows your payment
terms, including penalties for late payment and the discount, if any, for
prompt payment.
*
Be aware of the payment cycles for your industry. For example, if contractors
typically pay their bills by the 10th of the month, make sure your invoices
arrive in plenty of time for them to process your payment.
Call us if you'd like to review your credit policies.
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