The following is an excerpt from a conversation between the office manager, Terr
ID: 2449377 • Letter: T
Question
The following is an excerpt from a conversation between the office manager, Terry Holland, and the president of Northern Construction Supplies Co., Janet Austel. Northern Construction Supplies sells building supplies to local contractors. Terry: Janet, we’re going to have to do something about these overdue accounts receivable. One-third of our accounts are over 60 days past due, and I’ve had accounts that have stayed open for almost a year! Janet: I didn't realize it was that bad. Any ideas? Terry: Well, we could stop giving credit. Make everyone pay with cash or a credit card. We accept MasterCard and Visa already, but only the walk-in customers use them. Almost all of the contractors put purchases on their bills. Janet: Yes, but we've been allowing credit for years. As far as I know, all of our competitors allow contractors credit. If we stopped giving credit, we’d lose many of our contractors. They’d just go elsewhere. You know, some of these guys run up bills as high as $50,000 or $75,000. There's no way they could put that kind of money on a credit card. Terry: That’s a good point. But we have to do something. Janet: How many of the contractor accounts do you actually end up writing off as uncollectible? Terry: Not many. Almost all eventually pay. It's just that they take so long! Suggest one or more solutions to Northern Construction Supplies Co.'s problem concerning the collection of accounts receivable.
Explanation / Answer
1. Shorten Payment Terms
In the days of paper invoices and checks, it was fairly common for businesses to extend credit to customers to allow for mail and payment delays, by granting credit terms
2. Establish Credit Policies
If you were going to extend a customer credit, it would be a good idea to assess their ability to pay. The expense of performing credit checks may be more than worthwhile for many businesses.
3. Review Accounts Receivables Regularly
Track the aging of your receivables, and systematically follow-up on any accounts that are past due more than a predetermined number of days. A good practice is to run an aged receivables report from your accounting system on a weekly basis, paying special attention to any receivables that are over, for example, 20 or 30 days old.
4. Have EFT and Other Payment Options
An increasing number of businesses are now paying their suppliers using Electronic Funds Transfer. By specifying on your invoice that payment may be made by EFT, you will enable your customer to deposit payment directly to your bank account.
5. Maintain a Collections Record
For each over-due account, keep a log of when follow-up calls or emails were sent, along with a record of customer’s responses to follow-up calls.
6. Offer Discounts for Early Payment
Payments are often made first to companies that offer discounts. The popular 2%/10, net 30 Days Terms means that if a customers pays within 10 days they receive a 2% discount, with the total due in 30 days.
7. Use a Factoring Service
Using a factor is like selling your receivables to a third party at a discount. The costs involved with this method may be justified by greatly improving your cash flow, especially if you have a long collection cycle.
8. Use a Collection Agency
If you are unable to collect, you should submit the account to a collection agency. No one can guarantee to collect your outstanding receivables, but these companies tend to be very aggressive, and since they tend to charge based on the amounts they collect, this is a viable final option.
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