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.
* 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.