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Managing Credit and Accounts Receivable

As a small business owner, you likely know that cash flow management is essential for your company’s

long-term survival. You may not realize, however, that improperly managed accounts receivable is one of the most common causes of cash flow shortages.

Most small businesses have two types of customers. They have B2B customers or trade credit customers. Trade credit is simply extending credit to other firms.

Before a company grants credit to a customer it should ensure that the customer is worthy of that credit and that bad debts will not result. Checks should continue to be carried out on existing customers as a company would like to have early warning of any problems which may be developing. This is especially true for key customers of the company.

Once the decision has been taken to grant credit, then suitable credit terms must be set and the receivables that arise must be monitored efficiently.

A key area of the management of accounts receivable is the final collection of cash from customers. Any company must have a strict system to ensure that all customers pay in a timely fashion as, without this, the level of receivables and the cost of financing these receivables will inevitably rise, as will the risk and cost of bad debts.

What Makes up the Credit Policy for a Company?

If a company does a cost/benefit analysis and makes the very important decision to extend credit to its customers, then it must establish procedures for credit and collecting accounts. There are usually two parts of a good credit policy:

Terms of Sale

  • The terms of sale for a credit customer state how the firm will sale its products or services. Will the firm require a cash sale or will it extend credit? That decision is made through the process of credit analysis and determining who should be granted credit.

  • If the small business decides to grant credit to a customer, then it must establish terms. These terms will include the credit period and any discount you decide to offer the customer along with the discount period.

Collection Policy

  • If a company makes the decision to offer credit to its customers, it needs to develop a collections policy that it will use to monitor its credit accounts. Most companies use the Accounts Receivable aging schedule.

  • The accounts receivable aging schedule is a valuable tool. You can see at a glance what percentage of your credit accounts are late. Accounts Receivable aging is relatively easier for a business owner to keep an eye on credit accounts and fix any problems that might affect the firm's cash flow before they happen.

No company can force its customers to pay their bills. Companies can, however, take several steps to ensure payment. Want to manage accounts receivable more effectively? ZenFinance team is happy to share this knowledge with you and help cash inflows to your business!

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