Table of Contents

Chapter 1 - Credit and Collection Operations. 1

Overview of Credit and Collection Management 1

The Credit Conundrum... 1

The Collections Janitor Role. 1

Organizational Structure. 2

Job Descriptions. 2

Credit Manager Job Description. 2

Credit Clerk Job Description. 3

Collections Manager Job Description. 3

Collector Job Description. 4

Skip Tracer Job Description. 5

Probationary Period. 5

Work Allocations. 5

Staff Training. 6

Goal Setting. 7

The Watch List 8

Counterproductive Goals. 9

Staff Compensation. 9

Interdepartmental Relations. 9

Reports. 10

Credit Levels Report 10

Receivables Aging Report 11

Bad Debt Report 11

Customer Profitability Report 12

Employee Experience. 13

Chapter 2 - Credit Procedures. 15

Forms: Sales Order Form.. 15

Forms: Credit Application. 16

The Credit Examination Procedure (Manual System) 17

The Credit Examination Procedure (Integrated System) 22

Chapter 3 - Credit Controls. 28

In-Process Credit Controls. 28

Alternative Credit Control Systems. 29

Control System for Manual Credit Management 29

Control System for Computerized Credit Management 30

Additional Credit Controls – Fraud Related. 30

Additional Credit Controls – Periodic Actions. 31

Additional Accounting Policies. 32

Chapter 4 - Collection Procedures. 35

Forms: The Credit Memo Approval Form.. 35

The Collection Procedure. 36

The Credit Memo Request Procedure. 40

The Allowance for Doubtful Accounts Calculation Procedure. 40

Chapter 5 - Collection Controls. 44

In-Process Collection Controls. 44

Alternative Collection Control Systems. 46

Additional Collection Controls. 46

Additional Accounting Policies. 47

Chapter 6 - The Credit Policy. 50

Overview of the Credit Policy. 50

Credit Policy: Mission. 51

Credit Policy: Goals. 51

Credit Policy: Responsibilities. 52

Credit Policy: Required Documentation. 52

Credit Policy: Review Frequency. 53

Credit Policy: Credit Calculation. 54

Credit Policy: Terms of Sale. 54

Credit Policy: Collection Methodology. 55

Miscellaneous Provisions. 56

Revision Frequency. 58

Distribution of Credit Policy Revisions. 59

Chapter 7 - The Credit Application. 62

The Credit Application. 62

Adjustments to the Credit Application. 64

The On-Line Credit Application. 65

Trade References. 66

The Incomplete Application. 66

Updating the Credit Application. 67

Chapter 8 - Customer Credit Ratings. 69

The Credit Rating. 69

Internal Credit Rating Systems. 69

Third Party Credit Ratings. 71

Evaluating Credit Scores. 72

Use of Credit Ratings. 73

Credit Rating Errors. 73

The Five Cs of Credit 74

Chapter 9 - Ongoing Credit Monitoring. 77

Credit Documentation. 77

Indicators of Future Payment Delinquency. 78

Ongoing Credit Monitoring Actions. 79

Requests for Credit Increases. 82

The Riskiest Customers. 82

The Demanding Customer. 83

Effects of Industry Credit Practices. 84

Effects of General Economic Conditions. 84

Chapter 10 - Interpretation of Financial Statements. 87

Interpretation of Financial Statements. 87

Problems with Financial Statement Analysis. 88

Horizontal Analysis. 88

Vertical Analysis. 90

Cash Coverage Ratio. 92

Current Ratio. 93

Quick Ratio. 94

Liquidity Index. 95

Accounts Payable Turnover Ratio. 96

Accounts Receivable Turnover Ratio. 96

Inventory Turnover Ratio. 97

Fixed Asset Turnover Ratio. 98

Sales to Working Capital Ratio. 98

Debt to Equity Ratio. 99

Fixed Charge Coverage. 100

Breakeven Point 100

Gross Profit Ratio. 101

Net Profit Ratio. 102

Return on Net Assets. 102

Altman Z Score. 103

Essential Analysis Tools. 104

Limitations of Ratio Analysis. 104

The Going Concern Qualification. 105

Chapter 11 - Credit Risk Reduction. 107

The Risk Reduction Concept 107

Payment Guarantees. 107

Title Retention. 109

UCC-1 Financing Statement 109

Purchase Money Security Interest 110

Inventory Consignment 110

Collateral 110

Credit Insurance. 111

Factoring. 112

Letters of Credit 112

Export-Import Guarantees. 113

Outside Financing. 113

Distributor Sales. 114

Adjustment of Days to Pay. 114

Cross-Selling Risk. 114

Treatment of Customized Goods. 115

Portfolio Approach to Risk. 115

Alteration of Credit Terms. 116

Chapter 12 - Customer Billings. 118

Billing Processing. 118

Billing Processing. 118

Analysis of Billing Processing. 119

Billing of Change Orders. 119

Efficient and Effective Billing. 120

Payment in Advance. 120

Bank Account Debits. 120

Systems Integration. 120

Buffer Staff. 121

Contract Terms Verification. 121

Funding Verification. 121

Update Customer File. 121

Invoice Layout Improvement 122

Complex Invoice Separation. 123

Invoice Proofreading. 123

Invoice Creation at Delivery Point 124

Invoice Creation at Shipping Dock. 124

Electronic Invoice Delivery. 125

On-line Invoice Entry. 125

Shipping Log Exception Tracking. 126

Practices to Avoid. 126

Analysis of Efficient Billing. 126

Statements of Account 128

Chapter 13 - Payment Handling. 131

Check Receipts. 131

Check Receipt Improvements. 132

The Bank Lockbox. 132

Automatic Cash Application. 133

Mailstop Number 134

Remote Deposit Capture. 134

Special Check Endorsement Language. 134

Chapter 14 - Collection Tactics. 137

Overview of Collection Tactics. 137

Collection Tactics. 138

Courtesy Calls. 138

Grace Period Reduction. 139

Dunning Letters. 139

Check Payment by Fax or E-mail 140

NSF Check Resubmission. 141

Pay Undisputed Line Items. 141

Confirm Payment Date. 141

In-Person Check Pickup. 142

Take Back Merchandise. 142

Hold Orders. 142

ACH Debits. 143

Split Payments. 143

Postdated Checks. 143

Interest and Penalties. 143

Promissory Note. 144

Salesperson Assistance. 144

COD Roll 144

Barter 145

Arbitration. 145

Attorney Letters. 145

Final Demand Letter 146

Issue Small Claims Court Complaint 146

The Collection Reputation. 147

Credit Repayments. 147

The Collection Call 147

Preparation. 147

Scheduling. 148

Phone Skills. 148

Escalation. 149

Documentation. 149

In-Person Visits. 149

Chapter 15 - Payment Deductions. 152

Deduction Management 152

Subject Matter Experts. 152

Team Approach. 152

The Deductions Process Flow.. 153

Mitigating the Deductions Backlog. 153

Personal Visits. 155

Salesperson Involvement 155

Repairs Department Involvement 155

Product Returns Management 156

Planned Deductions. 156

Deduction Prevention. 156

Customer Terminations. 157

Small Discount Management 158

Early Payment Discounts. 158

Chapter 16 - Skip Tracing. 162

Cost of Skip Tracing. 162

Skip Tracing Information Sources. 162

Fee-based Search Tools. 165

Profile Reports. 166

Social Media. 166

Pretexting. 166

Location by Social Security Number. 166

Outsourced Skip Tracing. 168

Profile of a Skip Tracer. 168

Skip Tracing Documentation. 169

Chapter 17 - The Collection Agency. 171

The Collection Agency. 171

When to Use a Collection Agency. 171

When to Refer an Account to a Collection Agency. 172

Management of a Collection Agency. 173

Selection Criteria. 173

Pricing. 174

Contract Terms. 175

Speed of Referral 175

Paperwork Support 175

Effectiveness Issues. 176

Fraudulent Customers. 176

Liability Issues. 176

Feedback Issues. 177

Bonding. 177

Payment Tracking. 177

The In-House Collection Agency. 177

Chapter 18 - Litigation and Bankruptcy Tactics. 180

The Litigation Process. 180

Litigation Advance Preparation. 180

Litigation Prescreening. 181

Litigation Timing. 181

Collection Trigger Points. 182

Attorney Selection. 183

Small Claims Court 183

Money Judgment Collection Tactics. 184

Bankruptcy Activities. 185

Asset Reclamation. 186

Sell a Creditor Claim... 186

Chapter 11 Bankruptcy. 187

The Involuntary Bankruptcy Petition. 187

Chapter 19 - The Allowance for Doubtful Accounts. 190

Estimation of the Allowance for Doubtful Accounts. 190

Accounting for the Allowance for Doubtful Accounts. 191

The Direct Write-off Method. 192

Negative Bad Debt Expense. 193

Chapter 20 - Credit and Collection Technology. 195

Collection Software. 195

Document Imaging. 195

Payment Deduction Database. 196

Enterprise Resource Planning Systems. 196

Miscellaneous Technology Concepts. 197

Chapter 21 - Product and Service Improvements. 200

Pricing. 200

Incorrect Order. 200

Product Quality. 201

Shipping Damage. 201

Field Servicing. 202

The Improvement System.. 202

Chapter 22 - Credit and Collection Measurements. 204

Overview of Credit and Collection Measurements. 204

Days Sales Outstanding. 205

Best Possible DSO.. 206

Collection Effectiveness Index. 207

Measurements Based on Time Buckets. 208

Days Delinquent Sales Outstanding. 209

Average Days to Pay per Collector. 209

Collection Dispute Cycle Time. 210

Deduction Turnover. 210

Average Time to First Contact 211

Bad Debt Percentage. 211

Collection Performance Report 211

Average Time to Establish Credit 212

General Management Measurements. 213

Chapter 23 - Credit and Collection Laws. 215

CAN-SPAM Act 215

Equal Credit Opportunity Act 215

Fair and Accurate Credit Transactions Act (FACT) 216

Fair Credit Reporting Act 216

Fair Debt Collection Practices Act 216

Service Members Civil Relief Act (SMCRA) 217

Telephone Consumer Protection Act (TCPA) 217

Truth in Lending Act (TLA) 218

Answers to Chapter Questions. 220

Glossary. 243

Index. 246