Loose credit policies can be bad for business

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August 15, 2010

By David Compton The Meridian Star The Meridian Star Sun Aug 15, 2010, 08:30 AM CDT

MERIDIAN —

There are many ways to make your business more profitable, and sound credit policies are high on the list. If you haven’t done so lately, now is a good time to reexamine your company’s policies. Keep the following items in mind as you do your review.

   —   Don’t be so eager to sign on new customers that you neglect to check out their credit history. Take the time to check references, and obtain a credit report to see how they’ve handled other financial transactions.

   —   Establish collection policies, and follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectible. That cuts into your profits.

   —   Calculate what it costs to carry credit for your customers. Are you borrowing money to allow you to extend credit? If you shorten the time it takes to collect accounts receivable, you will reduce the interest expense on the loans you need to offer credit to customers.

   —   To speed collections, invoice customers when you ship the goods; don’t wait until the end of the month. Make sure your invoice clearly shows your payment terms, including penalties for late payment and the discount, if any, for prompt payment.

   —   Be aware of the payment cycles for your industry. For example, if contractors typically pay their bills by the 10th of the month, make sure your invoices arrive in plenty of time for them to process your payment.

   Sound credit policies and adhering to those policies increase your chances for business survival.

   David Compton is a Certified Public Accountant with offices in Meridian and Birmingham, Ala.

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