Safeguarding Accounts

Often, accounts receivable is one of the company's largest assets. It is usually a company's largest current asset, and the primary source of cash for the business. The credit department is responsible for safeguarding this asset against payment delinquency, and bad-debt losses. The essential elements of safeguarding accounts receivable are:

• Identifying risks
• Prioritizing risk management efforts
• Creating an environment in which managing credit risk is recognized as important to the success of the company
• Developing a risk management plan
• Identifying existing or potential credit risks to which the company is exposed, and developing strategies to manage or control those risks
• Ensuring that the pressure to increase sales and profits does not overwhelm the need to manage risk
• Ensuring that everyone working in the credit department receives adequate training
• Ensuring that there are clearly defined and appropriate levels of credit granting authority
• Carefully monitoring the collection process to ensure that it remains under control
• Documenting reasons for bad-debt losses so that mistakes can be addressed and corrected
• Making certain that the credit decisions being made are reasonable, sound and documented and finally
• Taking all necessary steps to ensure that the actions of the credit department are consistent with the goals and objectives of the company as a whole
• Making certain that adequate procedures exist for follow up and collection of delinquent accounts
• Making certain that all accounts age periodically and are reviewed by the credit manager to ensure that delinquent customers are being pursued vigorously
• Disputed billings are handled promptly and effectively.
• Procedures exist that ensure that interest and penalties are properly charged on delinquent accounts.
  

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.