Accounting Best Practices, Fifth Edition

Total Impact of Best Practices on the Credit and Collections Function

This section covers a group of credit and collections best practices that, when used together, will result in a very efficient credit and collections department. The group does not include all of the best practices covered in this chapter, for a small number are mutually exclusive. In particular, outsourcing the collections function does not allow one to implement many of the other best practices. Accordingly, it is assumed that collections work is kept in-house, so a number of other improvements can be implemented.

The recommended best practices are laid out in Exhibit 7.3 in order of the typical transaction flow that results in a completed collection activity. It begins with the sales department, which can reduce the amount of customer confusion by simplifying the product pricing structure. It then moves on to the credit department, which can standardize the credit-granting system, which results in consistent and reasonable customer credit levels, keeping the collections staff from having to collect on excessive sales amounts to customers who are not capable of paying. Finally, it reaches the collections department, where there are many best practices to make the collections task more efficient: lockbox collections, immediate cash application, unapproved write-offs of small balances, early payment discounts, stratified collections, and automatic faxing of overdue invoices and dunning letters, as well as automatic ...