Collection Policies

Are needed because all customers do not pay in time. Some customers pay at slow rate and some do not make payment at all. The objective of collection policy is to fasten the collection of debt. If the collection from debtors is delayed, additional funds have to be procured for smooth operation of selling and production activities. Delay in realisation from debtors also increases possibility of bad debts. Thus, the main objectives of realisation policy is to reduce the ratio of bad debt & reduce average collection period.

The collection policy means the steps which are taken to realise the debts from debtors for their default in non payment with in the stipulated time.

Proper coordination in sales and accounting department should be established to determine clear collection policy.

Another aspect of collection policy is the methods employed to realise the over dues. After the end of credit period, firm should undertake necessary steps to make collection from debtors. Initially the efforts should be polite but with the passage of time they can be made stringent. Among these methods following are included:-

    1. Reminder letters

    2. Telephone

    3. Telegram

    4. Extension of Payment Period

    5. Legal Action

Before taking any action, difficulties of customers should be examined. Therefore, following points must be considered for determining collection procedures:-

  1. Collection procedure must be clear.

  2. Before Starting action for collection, the nature of the customers and their business connections should be considered.

  3. The time gap between due date and action for realisation of debts should be determined separately for different classes of customers like regular customers, seasonal customers etc.

  4. So far as possible, legal action should be avoided.

  5. The expenses incurred on collection should not exceed the amount of collection of debt.

  6. While estimating collection cost, past experience should be considered.

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