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What Is a Collection Policy? What Is the Typical Sequence of Actions Taken When by a Firm When Attempting to Collect an Overdue Account?

Essay by   •  January 15, 2012  •  Essay  •  320 Words (2 Pages)  •  1,796 Views

Essay Preview: What Is a Collection Policy? What Is the Typical Sequence of Actions Taken When by a Firm When Attempting to Collect an Overdue Account?

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A firm's collection policy is the first step in making sure that accounts receivables turn into money in the bank. The phrase, "accounts receivables," refers to money owed by customers to the company. If a firm finds itself in the enviable position of choosing between several possible business opportunities, then they will base their final decision on which one to choose on several factors. One of those factors should be the extent to which accounts receivables are part of the prospective venture. For example, some companies do not provide any credit at all to their customers. The customer pays for the goods and services when the sale is made. But other industries will bill the customer. Until that bill is paid, the owed money is considered as part of the accounts receivable. The firm should determine how much time they want to spend on debt collection efforts. Cash flow is the lifeblood of a business, and an effective collection policy is essential to keeping the money rolling in. Whether one is looking to improve the existing strategy or starting from scratch a effective collection policy plays an important role:

Collection policy refers to the procedures used by a company to collect overdue accounts receivable. A firm may start with a reminder, form letter, telephone call or visit to encourage customer payment. The company may suspend further sales until the delinquent account is made current. Next, the firm may negotiate with the customer for past due amounts and report the customer to credit bureaus. If the goods were sold with a lien attached, collateral or corporate or personal guarantees, the company may pursue these options to obtain payment. As a last resort, the account may be turned over to a collection agency or referred to an attorney.

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