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Managing Debt

Learn how to manage credit and debt effectively with this free sample chapter from the Forums Credit Control Guide.

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This content is taken from our Credit Control Guide

No matter how good your procedures, or how effectively you manage them, it is inevitable that, at some point, you will face dealing with debtors. This section will help you to keep on top of what you are owed and assist with making recoveries. Effective debt management Average number of days to be paid. It is good practice in any firm to regularly monitor the collection of debts.

This is necessary for priorities to be identified and for assessing how successfully your firm's debt collection procedure is working. You will find it useful to calculate the average time for debt to be paid.

One formula for doing this is:

Amount owed at end of year x 365 = average number of days to be paid

Total value of sales during the year

Thus, if a firm sold £500,000 of goods the previous year and was owed £100,000 at the end of that year, the average period for payment would be:

100,000 x 365 = 73 days 500,000

The result of the above calculation could be distorted if you had a delivered a particularly large order towards the end of the previous year for which you had not yet received payment. Check the accuracy of the figure produced against the average collection time for a random sample of invoices from the same year.

Ideally, the average collection time should be equal to the supplier's terms of payment.

Cost of late payment

You should be aware of what it is costing you to reclaim late or overdue payments. You can find more information on this in Section 1 of our Credit Control Guide.

Aged debtors analysis You should ensure that you analyse your debts in order to establish debt collection priorities and to help identify problem customers. One of the most effective tools is the aged debtors analysis, which analyses debts by customer and by the age of the debt.

An aged debtor analysis can be performed manually, but can also be produced by many electronic financial packages. Using the latter, computer-generated reports can be automatically produced for particular customers or for debts that have been outstanding for a particular period. It is important to calculate whether it is economic to continue extending credit to the worst late payers. To do this, compare the profit generated by supplying them with the cost of their late payment. Rather than take the drastic action of ceasing credit, contact with the customer is usually advisable to remedy the situation. The aged debt analysis can be used to track progress and to review the situation later. It is advisable to do an aged debtor analysis at least monthly.

Forum debt recovery service Intermediate and Advanced members of the Forum are eligible to sign up for our debt collection and debtor tracing service. Our debt recovery service helps you to track down debtors and collect the money you are owed. An experienced debt collection team and set of legal experts will move rapidly down the legal enforcement route to ensure the best return for your business.

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