One major challenge in extending credit to customers is maximizing collection returns. Meanwhile, you need to have strong credit policies in place to minimize risk. Here are four ways business leaders can improve their profits:
1. Analyze collection trends.
Collection trends provide great data about credit policies. Chances are you’ll see both positive and negative indicators. Positive trends will be clear, like clients paying balances before due dates and not abusing credit usage. Negative trends may be more challenging to identify but include late payments and repeated extension requests.
2. Consider external factors.
External factors impact your collections performance.1 For example, lower sales should prompt you to consider more restrictive credit policies. This can reduce your exposure if an economic downturn forces your customers out of business.
Similarly, interest rate adjustments can often impact customer cash flow. The lower rates the Federal Reserve sets lead to few client defaults.
3. Use tracking tools.
Collections oversight is important, and the best tools ensure data is available when you need to make important decisions. Having software that provides immediate reports on accounts due and past due is a start, but other available tools can rate your portfolio and identify potential signs of trouble.
4. Understand collections activity importance.
Company decision-makers must prioritize their collections to increase profitability, but make sure you’re following collection best practices. For instance, positive and polite language in your payment terms is likely to result in faster payments and fewer customer debts.
You must go about your collection activities legally, effectively, and persistently.
While collections take available time and labor from your other billing processes, only effective practices help ensure better cash flow and profitability for you and your business.
1 Mitchell, Cory. 2016. “4 Factors That Shape Market Trends.” Investopedia. February 29. Source.