CAT T10-Monitoring and collecting debts part 1/2

Following the last article "Assessing Creditworthiness", this article aims to talk about the issues after granted credit to customers. We are still in the point of view of a credit controller. So what is the role of the credit control department? Credit control department is responsible for those stages in the collection cycle dealing with the offer of credit and collection of debts. The roles will include checking customers' creditworthiness, advising on payment terms, reporting to sales staff about new enquiries, dealing with customer queries, keeping the receivables ledger up-to-date, pursuing due debts and giving references to third parties. After assessing the customers' creditworthiness and granting of credit, we are going to have control action which is to monitor the receivables.

In monitoring the receivables, our main useful internal source is the aged receivables analysis which will show us each customers' total debts in different period, for example within 30 days, 31-60 days, 61-90 days and so on. This is important as we can easily track down which customer is taking more time to pay, next time we may not give that customer more credit. Other method of monitoring the receivables is to check the customers' financial reports. With this, we can find out the financial position of the customer and also the cash flow position by looking at the statement of cash flows. We can even do a ratio analysis on different customers' financial reports and those with problems must be taken into account.

There are many ways in practice for credit controller to monitor their debtors, but now let's talk about collecting the debts. We all know giving credit is easy, but collecting back the money is not always easy. Sometimes companies obtain default insurance (bad debt insurance) against certain approved debts going bad. But to minimise the cost to buy default insurance, we should try our best to encourage customers to pay promptly and chase payments from overdue debts. The ways that we can implement to ensure prompt payment from debtors include giving early settlement discount, deal with queries and complaints promptly, send out invoices immediately after the delivery of goods, issue credit notes as soon as queries have been resolved, issue monthly statements so that any problems can be highlighted early and provide customers with a list of company's terms of credits and their attention should be drawn to these terms. Apart from that, employing debt collection agency to help us collect debts may be one of the ways to collect debts earlier as debt collection agency collects debt for commission, they will try to make debtors pay promptly.

If the debtors have became overdue debts, ways to chase the payments from overdue debtors might include sending out reminder letters, make telephone calls to the debtor, charge interest for late settlement, employ the services of a debt collection agency, take legal action (discuss below) and send an authorised person from your credit control department to visit the customer and request payment. In larger companies, it is the role of the sales ledger staff to issue invoices and receive payments, but it is the responsibility of credit control staff to chase late payers. So methods to encourage promptly payments from debtors are referring to sales ledger procedures and chasing payments from overdue debtors are referring to credit control procedures.

If, having sent a final reminder, the customer has still not paid, legal action will need to be taken. A solicitor should be contacted, and they will send out a "letter before action", giving the customer one final chance to pay before a court summons is issued. But legal proceedings can be expensive, so we will try to find out whether the customer is likely to have funds to pay us before we take proceedings. If we know that they are in such financial difficulties that there is no chance of payment, we might wait until they have settle their problems as they may be willing to pay back us the debts. With this we can improving our relationship and they may pay back us promptly next time, we also ignored the legal costs.

Other ways to collect the debts include factoring and invoice discounting which I will discuss again in the next article as these need some understanding and sometimes people often confused invoice discounting with offering early settlement discount. With both of these methods, we are able to get advance pay for the debts.

Collection of debts are one of the most challenging job for credit controller which you can't avoid it if you are employed as a credit controller. You should know your role well that you are not the one to issue invoices, you are the one that make decision about giving credit, monitor the debtors and collecting debts from the debtors (in larger companies). Methods above are some guides for you about the work of credit controller (and you should note that it is a quite difficult job), for students of CAT T10, these information is useful to understand more about the function of credit controller. This article will be continued with part 2/2.