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Managing your debtors

Depending on the type of business that you are running, it may be beneficial to you to set up lines of credit for your customers. Selling on credit can help you to attract more customers to your business, and can encourage a higher volume of sales from each customer, as they do not have to pay for their purchases upfront.

There are, however, several risks related to allowing customers to buy on credit, including encountering unreliable customers who cannot or will not settle their accounts on time or at all. It is necessary, therefore, to have systems in place to properly screen, manage and collect from your debtors, in order to avoid interruptions in your cash flow and possible financial and legal issues in the future.

Establishing a credit policy is the best way to begin when considering setting up credit accounts for your customers. This policy refers to the actions that will be taken by your business to accept applicants for lines of credit, manage their accounts properly, and follow up on outstanding account balances, including taking legal action if necessary.

— New customers
All new applicants for credit accounts with your business should be properly screened, to ascertain their reliability. It is a good idea to create a form for your customers to fill out when they apply for a line of credit, setting standards that they must meet before you will approve their application.

The form should address the following three Cs of determining suitability:

— New orders
When a customer places an order, regardless of whether they are a new or established customer, it is important that you have a written record of the order and its stages of progression.

— Credit period
The credit period that you state in your policy will be the length of time you allow between the date of purchase and the date that payment is due. Standard practice for small businesses is a 30 day payment period, which will help you to manage your cashflow month by month, keeping your payable and receivable accounts in balance.

Establishing a credit period with your customers should always be done in writing. When they first apply and are approved for a line of credit, you can provide them with a set of terms and conditions in line with your credit policy, which should include their credit period. Also, when invoicing their account you should always specify on the printed invoice how long the customer has to provide payment.

You might consider either offering customers a discount for settling their accounts early, or imposing a fine for late payment. If you decide to do either of these, ensure that they are clearly stated on your printed invoices, and on your terms and conditions if you provide them.

— Collection policy
In the event of overdue or unpaid accounts, having a collection policy in place will assist you in what steps to take with your customers and when to take them.

The first step to take, as soon as the account becomes overdue, is to send your customer a reminder letter letting them know when their payment was due, how much is owed, and requesting that they settle their account within a specified period. One week to 10 days is generally considered an appropriate amount of time to wait before taking further action.

The second step, should the account remain unpaid, is to contact the customer by phone, reminding them again that their payment is overdue, and outlining any possible consequences should they continue to delay payment. It is important to remain polite in such instances, to maintain customer relations and avoid making the situation worse.

The third step to take if the first two have not yielded positive results is to enlist the services of a collection agency. This will incur a fee from the agency, so it is important to judge whether or not chasing the account is worth the financial cost and the cost in time and effort, or whether you are better off taking the loss and removing the customer’s line of credit.

Finally, in extreme circumstances, it may be necessary to take legal action. Before taking this step, make sure that you consult a specialist for legal advice to ensure that you are acting according to the law.

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