In dealing with accounts receivable (AR), we hope to sell to a receivable who can pay back on time. We can group the stages in receivables management into 4 stages.
1. Policy formulation
There must be a framework prepared for managing receivables. Such framework can cover the three periods: before giving credit, during credit period and the end of credit period. This will be the overall procedures of next three stages.
2. Credit analysis
Here we assess the creditworthiness of the new customer. Information about the customer could be obtained from bank references, trade references and credit reference agency reports. Generally we can also consider the 5C which banks always use, ie. character, collateral, capital, capacity and condition.
3. Credit control
After giving credit, we have to monitor the receivables, probably using aged receivables analysis, paying attention to those taking long time to pay. Administrative procedures should be in place, for example prompt invoicing, sending monthly statement as gentle reminder, maintaining account records and so on.
4. Collection of amounts due
Amounts due will be collected, this is the end of credit period. Procedures will be taken for overdue accounts such as telephone calls, personal visits, charging interest, stopping supply, sending reminders and legal action will be the last resort. For any action, benefit should exceed cost.
In a big company, credit controllers will be dealing with these jobs and they must communicate with sales and marketing department regarding to which customers to choose, how much credit limit to be given and how long is the credit period. This is to ensure that sales person does not sell to one who can't pay back the amounts due.
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