An Ounce of Prevention...
Sound Credit Decisions and Systematic Re-evaluation
By Michael C. Dennis,
The most dynamic, persistent and professional collection process will
have little chance of success if the original decision to extend credit
to a customer was flawed. Therefore, a well-managed credit department
must dedicate the appropriate amount time, energy, effort and resources
to making certain the initial decision to extend credit is sound, and
The best time to control risk is before an open account is established for
an applicant. Another important control point is when orders pending are placed
on hold because the account is over its credit limit, or past due or both.
Most credit managers are required to release orders to marginal accounts in
order for their employer to optimize sales and profits. All open account sales
involve some risk. Sales to marginal accounts clearly involve relatively high
risk of payment default or payment delinquency, and it is inevitable that bad
debt losses will occur sooner or later. No matter how carefully the credit
manager screens applicants before credit is extended and no matter how diligent
the company's collection effort might be, a certain number of customers will
be either unwilling or unable to pay invoices. Therefore, it is not an exaggeration
to state the problem this way: "Bad debt losses are an inevitable cost
to creditor companies of offering open account credit terms to customers.
Note: In some cases, conditions beyond the customer's control result in its
inability to pay its bills. For example, if a customer's place of business
is destroyed by flood or fire, it is unlikely that it will be able to pay its
bills on time -- no matter how much the customer may want to do so and no matter
how creditworthy the debtor company was prior to the disaster. In most cases,
businesses fail because of changing market conditions combined with management's
inability to respond quickly and appropriately to these challenges. In isolated
cases, losses result from deliberate efforts on the part of the debtor to defraud
its unsecured trade creditors... but fortunately these incidents are the rare
exception rather than the rule.
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