The Management of Debtors

Several factors should be considered bytherefore the cost of the investment in debtors.
management when a policy for credit control isBeyond a certain level of spending, however,
formulated these include:additional expenditures of debt collection would not
• The administration costs of debt collectionhave enough effect on bad debts or on the
• The procedures for controlling credit toaverage collection period to justify the extra
individual customers & for debt collectionadministrative costs.
• The amount of extra capital required toDebt Collection Procedures
finance & extension of total credit. There areThe three main areas which ought to be
might be an increase in debtors, stock & creditorsconsidered in connection with the control of
& the net increase in working capital must bedebtors are;
financed1. Paperwork.
• The cost of the additional finance required for2. Debt collection.
any increased in the volume of debtors(or the3. Credit control.
saving from a reduction in debtors).This costSales paperwork should be dealt with promptly &
might be bank overdraft interest, or the cost ofaccurately.
long term founds(search as local stock or equity)• Invoices should be sent out immediately after
• Any savings or additional finance required fordelivery
any increased in the volume of debtors (or the• Cheques should be carried out to ensure that
saving from a reduction in debtors) this costinvoices are accurate
might be bank overdraft interest or the cost of• The investing of queries & complaints & if
long term funds (search us long stock or equity)appropriate, the issue of credit notes should be
• Any savings or additional expenses incarried out promptly.
operating the credit policy (for example: The• If practical, monthly statement should be
extra work involved in pursuing slow payers)issued early so that old items on the statement
• The ways in which the credit policy could bemight then be included in customers' monthly
implemented. For example (1) Credit could besettlements of bills.
eased by giving debtors a longer period in whichTotal Credit
to settle their accounts. The cost would be theTo determine whether it would be profitable to
resulting increase in debtors. (2)A discount couldextend the level of total credit, it is necessary to
be offered for early payment. The cost would beassess;
the amount of the discount taken.• The extra sales that a more generous credit
• The effects of easing credit which might bepolicy would stimulate
(1) to encourage a higher proportion of bad debts.• The profitability of the extra sales
(2)An increase in sales volume.• The extra length of the average debt
Provide that the extra gross contribution fromcollections period
the increase in sales exceeds the increase in fixed• The required rate of return on the
cost expenses. Bad debts discounts & the financeinvestment in additional debtors.
cost of an increase on working capital a policy toDiscount policies
relax credit terms would be profitable.Varying the discount allowed for early payment of
Some of those factors involved in credit policydebt
decisions will now be considered in more detail.• Affects the average collection period
The Debt Collection Policy• Affects the volume of demand (and possibly,
The overall debt collections policy of the firmtherefore, indirectly affects bad debt losses)
should be search that the administrative costs &To see whether the offer of a discount for early
other costs incurred in debt collection do notpayment is financially worthwhile we must
exceed the benefits from incurring those costs.compare the cost of the discount with the benefit
Some extra spending on debt collectionof a reduced investment in debtors.
procedures mightBad Debt Risk
1. Reduce bad debt lossesDifferent credit policies likely to have differing
2. Reduce the average collections period, &levels of bad debt risk.