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Bad-Debt Losses 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 resources to making certain the credit decision making and order release process is fundamentally sound. The best time to control risk is before an open account is established for an applicant. Another control point is when orders are pending and on credit hold. Since most credit managers are required to release orders to marginal accounts, it is inevitable that bad debt losses will occur. 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 unwilling or unable to pay invoices. Bad debt losses are an inevitable cost of doing business on open account credit terms. 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. Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore. |
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