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Explain the methods a business could consider to minimise the risk of bad debts as part of its credit control system. - Leaving Cert Business - Question C - 2015
Question C
Explain the methods a business could consider to minimise the risk of bad debts as part of its credit control system.
Worked Solution & Example Answer:Explain the methods a business could consider to minimise the risk of bad debts as part of its credit control system. - Leaving Cert Business - Question C - 2015
Step 1
Assess customers' creditworthiness
Answer
To minimize the risk of bad debts, businesses should start by assessing the creditworthiness of potential customers. This can be accomplished by checking their credit history in advance, which may include seeking bank references, trade references, or consulting a credit bureau. By doing thorough checks, businesses can gauge the reliability of customers in meeting their financial obligations.
Step 2
Set appropriate credit limits and credit periods
Answer
Businesses should establish clear credit limits and specify credit periods for each customer. By creating policies that detail the maximum amount of credit provided and a definite timeframe for payment—such as a maximum credit limit of €5,000 with a payment due within one month—companies can effectively manage their risk.
Step 3
Offer incentives for early or prompt payment
Answer
Implementing incentive programs can encourage timely payment. Businesses can provide discounts or other benefits for customers who pay their invoices early or on time. This strategy not only improves cash flow but also builds stronger relationships with clients.
Step 4
Establish a policy for late payments/partial payments
Answer
It is crucial for businesses to have a clear policy regarding late payments or partial payments. This includes implementing penalties for late payments and rigorously enforcing these policies. Charging interest on overdue accounts can also act as a deterrent against late payments.
Step 5
Maintain an efficient administrative system
Answer
A well-organized administrative system is vital for effective credit control. This includes promptly invoicing customers, tracking payment demands, and following up through phone calls and visits when necessary. Taking legal action or threatening legal recourse in case of non-payment can also help ensure payment. Additionally, if credit facilities are granted, it's important to regularly review and ensure that they remain effective.
Step 6