Start with the basics of a smart credit policy - create guidelines for granting credit.
1. Check customer’s credit history. 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.
2. Establish and publish your collection policies. Follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectable. The better your cash flow management, the more solid your assets.
3. Calculate the cost of granting credit to your customers. For example, if your business generates $1,000 per day in credit sales, and it takes you an average of 60 days to collect, your cost of providing credit to your customers is $3,000 per year. This example assumes you can borrow money at 5% interest. By speeding up the average collection to 30 days, you cut your carrying costs by half.
4. Speed up collection cycles. Invoice customers when you ship the goods rather than on a monthly basis. Make sure your invoice clearly shows your payment terms, including penalties for late payment and a discount, if any, for prompt payment.
5. Become familiar with 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.
Charles P Myrick CPA specializes in small business accounting services that are proven to optimize cash flow management. Contact us for information.
