Credit Management With Cash Collection Process

Written By Alla Levin
September 20, 2021
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Credit Management With Cash Collection Process

A company may grant credit to individuals or other businesses for products purchased or services rendered to them according to the wikipedia definition.

It will issue invoices to them with the terms of payment stated. Some days will be given from the invoice date to the specified date of payment. The recovery of cash for invoices previously issued by a company is regarded as cash collection.

All unpaid invoices are referred to as “outstanding invoices.” If an invoice remains unpaid after the time span given for its payment has elapsed, it is considered overdue. The cash collection process aims at payment recovery for outstanding invoices. It also involves the management of payment settlements to prevent the debts from becoming bad or doubtful.

Usually, issued invoices have terms of payment indicated on them. The “credit term” determines the number of days given for cash collection. However, the customer (a business or an individual) may pay before the due date. A customer’s diligence to pay on time can positively influence the time span given for cash collection.

The credit department of a company sets a credit limit for each customer. The credit limit specifies the highest amount that can be granted as credit. However, it depends on the payment history and finances of a customer. Harsh financial conditions can force a company to reduce its credit limit. The reduction is necessary if the business cannot bear the losses from bad debts.

Benefits of cash collection to companiesBenefits of cash collection to companies

A company may grant credit to its customers to gain sales. The business may also experience an increase in market share as the population of its potential customers expands. Unfortunately, the company loses if the customers fail to pay their debts. Cash collection enables companies to receive payments for credit granted to customers.

The process ensures timely payment of invoices and manages new credit terms. When a customer issues a check for payment, the company’s employees will match it with the related invoice. The funds should be deposited without delay. Then, they should update the firm’s cash records and the customer’s account. Cash collection helps companies to prevent losses due to bad or doubtful debts.

How to reduce the time span for cash collection

Allowing credits to customers may have a negative impact on a business’ cash flow. Your company has to collect payment sooner to improve its finances. There are several ways to shorten the timing for payment.

Prompt issuance of an invoice

Never delay the payment by not giving an invoice to the customer on time. Once provision of services or delivery of goods has been completed, issue an invoice to the customer.

Notify customersNotify customers

Contact customers before the payment date, especially those with reasonable outstanding balances. You can send them a notice to remind them of the due date.

Visit the customer

A personal visit to a customer can be effective in recovering overdue payments. If there is a complaint about any purchased item, the customer should pay for other goods first. The company then investigates the item in dispute.

Communicating with customers is vital to cash collection. It will help you to identify problems and disputes that might delay payment. Besides, make sure that your dunning actions are demanding but in a neutral manner.

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