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PROCEDURE
5. Collection performance and targets to be maintained within acceptable standards
Every day that an amount remains overdue (after the allowance of a 30-day credit period) we loose profit through having to;
- administer the overdue invoice,
- raising and sending letters,
- telephone/fax calls,
- paying suppliers,
- using overdraft.
With net profitability at 10% it will take 36 days to erode 25% of net profit and *146 days to totally erode net profit. These figures are based on our:
*Average sale of £400,
Annual cost of administration of overdue accounts is 25% of ‘average sale’, being £100,
365 (days in year) divided by £100 (annual cost) = 3.65 multiply by 40 (10% of £400) = 146 days.
We currently run at an acceptable level of 45 days from invoice to payment (see section 1. above): this figure also represents our cash collection target.
Our current annual credit turnover of £600,000 gives us a monthly sales figure of £50,000 (600,000/50,000), and a daily figure of £1,644 (600,000/365). With 45 days being our average overdue period and our average daily sale being £1,644, our outstanding credit balance figure at any one time is £73,980 (45 x £1,644). The figure of £73,980, or less, represents our monthly target.
Those responsible for achieving targets must be measured to ensure their performance is effective and efficient, and that they maintain acceptable recovery levels. Our present compliment of credit control staff is two; being a sufficient number to achieve necessary performance levels.
Each controller has approximately 50% of the sales ledger to maintain, being;
£36,990 in balances (£73,980 total outstanding, divided by 2)
and,
92 accounts/customers (£73,980 divided by average outstanding per customer £400 = 184 divided by 2).
6. Overdue Collection and Reporting
Every Monday a.m. the Credit Manager will determine cash targets and workload for each Credit Controller. Every Friday p.m. the Credit Manager will debrief the Credit Controllers and compile a report of the weeks activities for the Accounts Director.
The Credit Manager will monitor the Credit Controllers performance by viewing the daily log (completed by the credit controller) of payments received within their specific sales ledger portfolio. The content of the log should include:
- The name of the debtor,
- The account number,
- Payment amount’
- Original due date.
7. Payment Posting
All payments are to be handed to the Credit Controller with remittance advice and accompanying correspondence by 10 a.m. each day for customer identification and immediate posting to the identified account. All unidentified payments are to be posted to the ‘suspense account’ and a standard letter sent to any contact address within the letter.
8. Query Control
All queries must be originated through the relevant Credit Controller. The controller will then log a ‘response by date’ and the name of the person dealing with the query and a brief outline of the query.
A memo, to the person dealing, must be raised for queries that are not responded to by the agreed date, with a time limit not exceeding 7 days. The Credit Manager must look into all queries outstanding after a 7-day memo and then memo the Accounts Director if not immediately resolved.
The authority to write off query amounts:
9. Debt Recovery and Bad Debt
The Credit Manager is responsible for the early identification and actioning of accounts that are considered as ‘debt recovery’ i.e. accounts that require collection agency and/or litigation action. The Credit Manager has authority to incur cumulative debt recovery/litigation fees to the lower of 10% of the outstanding amount or to a maximum of £500 for each case. The authorisation of the Accounts Director is required for cumulative fees over £500.
10. Bad Debt Write Off
The Credit Manager is responsible for the early identification of bad debt write off.
The bad debt write off authorisation per account:
- Credit Manager £1,000
- Accounts Director £2,500
- Managing Director over £2,500
11. Reporting Structure
We use a hierarchical Reporting Structure to authorise credit sales as follows: - Up to £5,000 Credit Manager
- Up to £10,000 Accounts Director
- Over £10,000 Managing Director
In the absence of the Managing Director, two directors must authorise credit sales in excess of £10,000 but no more than £20,000.
12. Credit Management Reporting
The Credit Manager will report to the Accounts Director at the end of each monthly period. The report is required to cover:
A report of key issues within policy, procedure, systems, staff (credit, sales and administration) and management.
An overview of the relevant months activity, a month on month and year on year analysis of all key areas, and to include all of the following:
1. Amount due, number of accounts and percentages not yet due,
2. Amount due, number of accounts and percentages between 1 – 30 days overdue,
3. Amount due, number of accounts and percentages between 31 – 60 days overdue,
4. Amount due, number of accounts and percentages between 61 – 90 days overdue,
5. Amount due, number of accounts and percentages over 90 days overdue,
6. Amount due, number of accounts and percentages with debt agencies and/or solicitors,
7. Amount due, number of accounts and percentages with non-arrears related queries, broken down into query type, sales area/person, product/service.
The Credit Management report will form part of the companies monthly management accounts for discussion at board level.
This Credit Policy is subject to continual change. All updates will be notified by the issue of an updated Credit Policy document. It is the responsibility of individual department heads to ensure the use of up to date copies.
Date of Issue: 01 Jul 2003/
2 Procedure of Working Business Credit Policy |
