Managing Bad Debt - Importance Of Good Collection Skills

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Managing credit and collecting money are the 2 most important and vital factors which decide the fate of any business.

Right now, with cash tight and business slowing down, companies need to go after the bad debts as a way to raise needed cash. They need to go after the receivables even it if means getting just something now!

Like all significant economic change, it creates opportunities for those who have it in them to deal with it. During economic downturns, one of the main reasons why businesses go under is because they run out of cash. However sound your business is in other ways, successful cash flow management should be your main priority.

A recent study on the growing sicknesses in industries and businesses reveal that BAD DEBT is the one major cause for bankruptcy. In a buoyant economy, selling on credit has a number of advantages, especially when it generates a larger volume of business as well as widens one's market share. In fact, selling on credit often 'Makes' or 'Breaks' a sale and at most times gives one that edge over competition. Yet, one cannot afford to take this area of credit control lightly, as too many companies everyday are mounting with debts that are increasingly doubtful of recovery.

The volatile business conditions of recent years have created problems of cash flow and interest charges never before encountered.

Companies large and small have, in many cases for the first time, come to realize that the trade debtors or receivables, on the balance sheet represent a very substantial and expensive consumer of capital employed. They are also now beginning to accept that, in total, trade debtors represent an investment in the market –place on which the expected return is the profit to be earned only when payment has completed the sale. At the same time, like all investments, those trade debtors are subject to the risks arising from the effect of the economic climate on that market-place generally.

The most precarious risk to a company’s profit on the sale is however, by way of interest expense from non-payment to time. In essence, that is what credit management is all about and its objective can be said to be “to have the highest possible debtors (sales) for the shortest possible time (collection / profit)”.

Has it ever occurred to you that before the customer buys your goods, both are interested (he in your goods and you in his money), but once he gets the goods he is not interested-it’s only you (for your money!!).

A company can have the finest product, a superb sales record and the most dedicated workforce, but if it does not get paid (.... and on time!) it will die. An unpaid debt is a loan being financed by your company - it means that many companies are prevented from achieving their full potential, because instead of using borrowed money to develop and grow their business, they are having to borrow money just to fund their own sales ledgers.

Research consistently shows that a typical invoice will on an average be settled in not less that 72 to 78 days. A widely quoted survey by Intrum-U.K. fixed the period at 72 to 78 days. As 30 day terms are normal, the extra 48 days have a significant effect on profit and loss. It can even be the critical factor affecting a company’s survival.

Good cash collection procedures therefore can make the difference between a profitable business and one forced into liquidation because of slow payments and default on outstanding debts.

Managing credit and collecting money are the 2 most important and vital factors which decide the fate of any business.

One question I am asked constantly by salespeople is: “Is it the sales person’s job to collect? In answering this, I run the risk of alienating myself from many members of my profession because I have always been of the opinion that the number one cause of bad debts, “write--offs”, and corporate cash flow problems is the salesperson’s lack of skill in this vital element of the sale. Why this lack of skill?

Here are some of the most common reasons:

* Many salespeople ignore the fact that a “sale” is only a “sale” when the goods or services are paid for!

* A number consider “asking for a cheque” to be a menial task which should be carried out by clerks in the accounts department.

* Others see their job as “my role is to get the order, not to waste time collecting cheques”.

* Few sales induction programmes offer advice or are held in getting payment, with the result that money is rarely mentioned at the sales call presentation.

* Some salespeople, understandably too, have enough difficulty getting the order without putting it at risk by haggling over payment terms.

* Too many salespeople think only in terms of getting the best deal for the customer and forget that they are obliged to get the best terms for their company as well.

You may be thinking this does not apply to your organization and if that is the case you are fortunate indeed. However several companies do have such problems and the only differing factor is the name of the company. If this problem exists within your own organization, recognize the futility of changing the system; as the root cause of the problem is elsewhere -- in the attitudes / improper training of the people in collection procedures / techniques. Until such time as you can bring about a change with a proper training, your cash flow difficulties will continue to escalate.

REMEMBER: Cash is to business what blood is to the body -- allow it to drain away and the body becomes weak and eventually dies.

Managing Bad Debt - Importance Of Good Collection Skills

By GERARD A.

An Article by

GERARD A.

A Business Trainer from Chennai, India

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