Home: Collection: Practices

In order to understand the collection process, we need to start at the beginning. A successful Credit/Collections Department is created by knowing the industry in which they operate in, and understands the requirements of Management, Sales and Operations, in addition to the requirements of a company's customers. Once needs are known, a set of guidelines are formed, and the Credit/Collections Department can begin to operate knowing what must be done in order to satisfy the needs of all parties involved.

In a nut shell, the purpose of the Credit Department is:

1. Determine Credit/Collection Policy and 
2. To Carry Out the Credit/Collection Policy.

Once basic credit philosophy has been decided upon, main credit policies are then established. These policies are generally concerned with the following:

1. Opening new accounts.
2. Establishing lines of credit.
3. Methods of lowering risk and increasing line of credit.
4. Maintaining credit on existing accounts.

Collection Management is the other side of the Credit Management. Whatever money has been extended on credit must be collected. The first decision is to determine the basic credit and collection philosophy which are as follows:

1. Liberal credit, conservative collections.
2. Moderate credit, moderate collections.
3. Conservative credit, liberal collections.

Generally both credit and collection departments establish policies for the following issues:

1. Types of contact with customers.
2. When contact is made.
3. How customer's past due condition effect current customers or orders.
4. Stages of collection.
5. Collection on secured  or unsecured credit transactions.
6. Collection against liens & bonds
7. Use of the courts, outside attorneys or collection agencies.
8. Bad debt write off.
9. Reserves for bad debt.

In order to fulfill the above requirements, an organization must be equipped to handle all of the collection requirements either by being self contained and meeting staffing requirement, responsibilities and duties. Implementing a chain of command and lines of authority to oversee workflow productivity or by outsourcing bad debt to a collection agency.

As you can see, extending credit to either an individual or business takes careful planning, risk, in addition to office manpower to ensure that all steps have been properly followed and executed.

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