Calculated Credit Processes Improve Cash FlowBusinesses small and large understand the significance of bad debt write-offs and their impact to the bottom line, for the most part. However, many fail to make collection of these past due accounts a priority, due to resource and time constraints. Nevertheless, taking a proactive approach to managing commercial credit and collections will ultimately improve your cash flow.

Proactively Managing Credit & Collections

Rather than waiting until customers have past due invoices, it is best to take steps to mitigate credit risk from the start. Having credit and A/R (Accounts Receivable) management processes in place will not only reduce the risk of bad debt, but also can save a company a great deal of money that would otherwise be spent on debt collections. Following are some recommended steps the credit department can take in order to better manage the credit and collections process, reduce bad debt and increase cash flow:

A Detailed Credit Application Process

The importance of a comprehensive credit application cannot be stressed enough. Having a detailed credit application process in place means using a credit application that obtains essential information from a prospective, or existing, customer that will facilitate verification and assessing credit risk. Furthermore, the application should be completed by all credit applicants. If details are left blank, follow up with the customer to get as much information as possible.

Following are some of the key pieces of information that should be obtained on a credit application:

  • Applicant’s Name
  • Company Address
  • Contact Information
  • Legal Structure
  • Legal Business Name and DBA, if applicable
  • Nature of Business
  • Years in Business
  • Names of Officers/Principals
  • Social Security Number (SSN)
  • Federal Tax ID Number
  • Business License(s)
  • Estimated Annual Sales
  • Trade References
  • Bank References
  • Line of Credit
  • Estimated Annual Purchases
  • Signature & Date
  • Personal Guarantee (Optional)

Risk Assessment

Creditors who are more selective about which customers they do business with tend to have significantly less issues with commercial debt collections later on. The risk assessment process is the time to be selective about not only who you will extend credit to, but also how much.

Once the credit application has been completed, it’s time to assess potential risk of extending credit to the business. During this phase, information obtained on the credit application is reviewed and verified. Contact trade references to understand the business’ payment history, buying trends, history of disputes and other potential issues that could impact how the customer will repay you. Also, bank references should be contacted. Running a business credit report will also provide helpful information.

Once all of the information collected, it is time to determine whether or not you wish to extend credit to the business. Then, assess how much credit should be extended. This determination will also depend upon the customer’s intended purchases. If the level of credit to be extended is minimal, your risk assessment may be simpler as the risk is immaterial.

In addition to these traditional methods for reviewing customer accounts for credit limits, it is helpful to get to know your customer. Do this by engaging in conversations to understand more about their business and the expectations they have of you as a supplier. Conduct your own searches by checking out their company website and social media presence on Facebook and Twitter.

Regular Account Reviews / Modifications

Even after a customer account has been opened, your job is not done. Periodic reviews are key to taking a proactive approach. Minimize the need for commercial debt collections by conducting regular account reviews. During the review, verify and update customer information. Assess purchases that have been made and the customer’s payment history. If necessary, make changes to the credit limit. Running an updated credit report may be in order too. Most creditors find that conducting reviews of existing accounts on an annual basis is sufficient.

Obviously, not all new accounts require the same level of review but the extent to which you need to review accounts should be done on a case-by-case basis. The higher amount of credit to be extended, the greater the risk and therefore more time should be spent with a proactive approach to minimize bad debt risk.

As a Credit Manager, what proactive approaches have you had success with?