Week 12 - Collection Policy AND Procedure PDF

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Credit and Collection Collection Policies and Procedures

Module 10 COLLE COLLECTION CTION POLICIES AND PROCEDURES

At the end of this module, the students are expected to: 1. define collection policy and collection procedure. 2. Identify and explain the collection goal. 3. explain the collection policy goals. 4. Analyze the standard operating procedure for the collection of debt from non-paying customers.

COLLE COLLECTION CTION POLICY A collection policy is the set of procedures a company uses to ensure payment of overdue accounts receivables. Generally, a collection policy systemizes the steps taken to recover amounts due prior to litigation. This includes when a customer should be contacted, how they should be contacted, how disputes are resolved, when internal or external “collectors” are used to step-up collection efforts, and ultimately when and whether to turn the account over to litigation or write-off the debt. The steps that a company follows in ensuring timely payment of its accounts receivable. Collection policies vary by company. An example of the steps a company can take involves a friendly phone call to make sure payment is made on time, followed by a firm phone call when a payment is late, followed by a threatening letter, and finally turning the client over to a collection agency. Companies may deviate from their collection policy for long-standing or otherwise trusted customer.

General Collection Polici Policies. es. One of the primary factors that should be considered in the formulation of general collection policies is the need for immediate recovery of the credit granted. In the appliance industry, the interest rate is an effective 50% to 70% per year. It is so designed because of: a) the high cost of collection: motorized field collectors b) higher “bad debts” risk

AMELIA S. BICALDO, LPT, MBA, MM, LFA

Credit and Collection Collection Policies and Procedures

Installment payments must be collected on time so thay can be used to purchase new merchandise that will be sold for more profits. Slow collection will force an appliance company, or any other supplier of credit, to borrow heavily or more frequently, reducing its financing or overall income.

Some of the areas where general collection policies have to be formulated are: 1. Hiring of collectors a) Job requirements b) Protection against loss of cash collections thru selective hiring and surety undertakings c) Customer orientation - a precautionary measure. 2. Procedures in the handling of collections a) Collection for cash b) Other collection techniques 3. Surcharges and penalties 4. Field motorized collection versus collection letters 5. When to send motorized collectors/ collection letters 6. Collection incentive program 7. Insurance policy to be assigned by debtor 8. Using service charges 9. Use of acceleration clause

The Co Collection llection Go Goal al Collection policy goa goals ls can take a liberal or conservative approach to collections, allowing that to define their collections procedures. A business that takes a more liberal approach will be more flexible and willing to work with a delinquent account while a more conservative approach will require strict adherence to credit guidelines. Credit policies that reflect a more conservative approach may set goals that strive to maintain an average effectiveness rate – commonly called a collectible effectiveness index or CEI – of 80 percent, keep the average days outstanding or DSO at or below 40 days and maintain a

AMELIA S. BICALDO, LPT, MBA, MM, LFA

Credit and Collection Collection Policies and Procedures

minimum of 80 percent of accounts receivable in a current status, 15 percent at 30 days out, 4 percent at 60 days out and 1 percent at 90 days. The collection goal for the month or year is the total amount that must be collected to bring all accounts up-to-date or in current form. The collection goal is made up of the accounts (except those that are not due in the current month). For example, an account granted March 2019 on a 60 day term, is not due as of the cut-off date of April 30, 2019, so that as of the cut-off reporting period, it is excluded. Creditors are not allowed to collect from an account that is not yet due. Granted 3-17-19

due date 3-31-19

4-30-19

5-17-19

5-31-19

This account, being due on May 17, which is after the cut-off date of 4-30-19, should not be included in the collection goal. If the cut-off period becomes 5-31-19 (next month) and the account remains unpaid, then it is included as part of the collection goal. The collection goals are calculated: MERCHANDISE CREDIT

AS OF APRIL 30, 2019

All past due accounts

P

Maturing accounts, April 2019

500,000 3,000,000

Total collection goal for April 2019

P 3,500,000

Thus for the supplier of merchandise credit, it must collect the goal of P3,500,000. If it does, the collection efficiency is 100%. The formula for calculating the collection efficiency is:

Collection efficiency

=

Actual collections Collection goal

=

P 3,000,000 P 3,500,000

Note: the figure of P 3,000,000 for actual collection is an example.

AMELIA S. BICALDO, LPT, MBA, MM, LFA

= 85.71%

Credit and Collection Collection Policies and Procedures

APPLIANCE COM COMPANY PANY

AS OF APRIL 30, 2019

Past due installment as of 4-30-19

P

Installment falling due in April

200,000 500,000

Total collection goal for April 2019

P

700,000

If the actual collections for April 2019 is P590,000, then the collection efficiency is:

Collection efficiency

=

Actual collections Collection goal

=

P 590,000 = 84.29% P 700,000

Note: In appliance companies, the amounts used are not the balances of the accounts but the installments that are due.

Because cash collection have a significant impact on the operations of appliance companies, the use of this efficiency ratio is accepted and widely used in the industry. Banks prefer to use the aging of accounts. They are particularly concerned with their past due ratios. Their past due ratios are continually being monitored by top management and also by the Bangko Sentral. The past due ratio is calculated:

Past due ratio =

Past due accounts Total Amount of Loans

If the bank’s past due ratio is over 25%, some of their privileges are suspended by the Bangko Sentral. Past due accounts are also called NPL’s or non-performing loans.

AMELIA S. BICALDO, LPT, MBA, MM, LFA

Credit and Collection Collection Policies and Procedures

COLLE COLLECTION CTION PROCEDURE Collection proce procedure dure is the detailed list of steps for ordered execution leading to when and how to collect past-due amounts. The credit policy details the collection procedures. Detailed statement of steps to be taken regarding when and how the past-due amounts are to be collected. Collection procedure is laid down usually in the credit policy. Collections procedures can not only outline steps to collecting on delinquent accounts but also include steps to preventing accounts from becoming delinquent. Providing new credit customers with terms of sale and payment information and including this information on credit receipts and statements can serve to remind customers of their credit obligation. In-house collections procedures should include a schedule for contacting customer with past due accounts. A business can, for example, send a past-due notice and start making weekly collection calls when a payment becomes seven days late. If payment is not received, calls can become more frequent. If the customer is still past due at the end of 30 to 90 days, the business can then refer the account to a third-party collection agency or consider taking legal action.

Proced Procedural ural Considerations Although in-house collections are not subject to the rules and regulations of the Fair Trade Debt Collections Act, treating customers with dignity and respect is critical. Procedures should stress this point and include instructions such as keeping calls short, to the point, non-personal and non-threatening. Always allow a customer to explain their position and then work with the customer within parameters set by the approach the business adopts. This can work even in a conservative approach. The business may allow a customer to set up a new payment schedule, but call a day or two before the payment is due to make sure the customer understands the importance of respecting the new agreement.

AMELIA S. BICALDO, LPT, MBA, MM, LFA

Credit and Collection Collection Policies and Procedures

The simplest monitoring technique is by using a list of accounts, generated at the beginning of each month. This list is then broken down into smaller number of accounts to be assigned to every collector. Accounts that historically do not need field collection (those who pay at the office) should be given to the branch cashier so that phone calls or text messages could be sent out before the due date, emphasizing the prompt payment of discount. The accounts for field collection are further broken down into: 1. Seriously past due acccounts for possible repossession. 2. Past due accounts, 2 months 3. Past due accounts 4. Accounts falling due in this month (current) The Standa Standard rd Operating Procedu Procedure re for the Co Collection llection of Debt From Non-Payin Non-Paying g Customers

Collecting debts from customers is a balancing act for business owners. Getting the money is important, but not offending or alienating customers is also a goal in business. Although the specific procedures for collecting a debt can vary, a company needs to follow several general guidelines to ensure collection while trying to retain customers for future sales. Second Invo Invoice ice The first step in collecting a debt from a customer is to send him a second invoice clearly marked as overdue. If the customer neglected to pay because of a simple oversight, he may rectify the account quickly. Invoices should be sent at 30-day intervals. Call Call the person in charge of paying the invoice and remind him the account is past due. Ask for the total balance to be paid. In normal procedures, where a finance charge or interest is added to a past-due account, point out this fact.

AMELIA S. BICALDO, LPT, MBA, MM, LFA

Credit and Collection Collection Policies and Procedures

Remain resolute and committed to collecting the debt but be professional and courteous. Listen and Negotiate Listen to the customer's response and try to be understanding. He may have a legitimate reason for being late in paying the bill. Offer alternatives without conceding the debt. For example, the customer may have had an unexpected financial situation that forced him to postpone payment. If his payment history had been good, a restructure of payments may be acceptable. However, if the customer has had a history of late payments, leniency may not be the best approach. Debt Collection Agency A licensed debt collection agency may agree to collect an overdue debt for a percentage of the balance due. The procedures used by debt collectors are governed by the federal Fair Debt Collection Practices Act, which prohibits overly aggressive or invasive tactics. Businesses also must follow state laws on debt collection. Legal Actio Action n When the credit firm have made several contacts with a non-paying customer and he hasn't resolved the account, you may need to consider legal action. Small-claims court is one route a business can take to collect overdue debts. However, for significant amounts beyond small claims, the services of an attorney are recommended.

AMELIA S. BICALDO, LPT, MBA, MM, LFA

Credit and Collection Collection Policies and Procedures

Referen References ces and Supple Supplementary mentary Materials Books and Journals 1. Mutya, Ruby F. Alminar-Mutya, 2017. Introduction to Philippine Money, Credit and Banking. Second Edition. Mandaluyong City 2. Briones, Jose Glenn Sr., 2015. Credit and Collection Management Made Easy for Filipino College Students. Mandaluyong City, National Book Store, Inc.

Online Su Supplementary pplementary Reading Ma Materials terials 1. Collection Procedure https://thelawdictionary.org/collection-procedure/19N0vember2019 2. Collection Policies and Procedures https://smallbusiness.chron.com/collection-policies-procedures-71619. html19November2019 3. Collection Regulations http://www.bsp.gov.ph/regulations/regulations.asp?type=1&id=1499 4. Collection Policy Sample https://verenigingvoorcreditmanagement.nl/web/wp-content/uploads/2017 /08/Sample-collection-policy.pdf 5. Collections http://nacm.org/join-nacm-2/558-resources/best-credit-and-collectionpractices/2742-collections-policy.html 6. Standard Operating Procedure on Collection of Nonpaying Customers https://smallbusiness.chron.com/standard-operating-procedure-collecti on-debt-nonpaying-customers-42036.html Online In Instructional structional Vi Videos deos 1. How to Improve Collections/ 8 Accounts Receivable Tips https://www.youtube.com/watch?v=uif5knxTOWg18November2019 2. Credit Policies and Procedures Ten Minute Tips Professionals https: https://www //www //www.yout .yout .youtube.com/ ube.com/ ube.com/watch watch watch?v=ob ?v=ob ?v=obVSRAB VSRAB VSRABqKK8 qKK8 qKK818No 18No 18Novembe vembe vember2019 r2019

AMELIA S. BICALDO, LPT, MBA, MM, LFA

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