The objective of debtor management is to minimise the time between issuing an invoice to a client and collecting payment in full. A practice’s four main debtor management decisions are:
- Whether credit should be provided to clients.
- Which specific clients should be given credit.
- The credit period or trading terms given to clients.
- The maximum amount of credit to be given to a client at one time.
The ideal situation for a practice is to offer no credit terms to clients and collect 100% of the income upfront before providing the services. Unfortunately, the reality is only a few exceptional businesses, like Apple for example, can do that. Practices generally require cash payments upfront from individual clients and only provide credit to business clients.
The aim for a practice is to provide credit to ‘good’ clients who pay their accounts on time as this maximises sales whilst not incurring bad debt costs. Before offering credit to a new client the following needs to be done:
- Get the signature of the client that they have read and understood all the credit terms and conditions and have agreed to abide by them. This is normally included in the standard practice engagement letter.
- Trade credit references supplied and checked. This is included in most practice operational manuals but rarely done in practice. It is normally forgotten in the excitement of gaining a new business client.
- Comprehensive details of all directors, partners or owners plus a deed of indemnity and guarantee provided by all the directors of a company client.