Managing debtors better 2.1.4

Debtors - is a person or business that owes money to a creditor. Unlimited liability should mean that credit is easier to obtain as suppliers have a greater chance of getting their money back if things go wrong.

1) Credit control

• Policies on how much credit to give and repayment terms and conditions
• Measures to control doubtful debtors
• Credit checking

2) Selling off debts to debt factors

3) Cash discounts for prompt payments

4) Improved record keeping - e.g. accurate and timely invoicing.

5) DEBT FACTORING (the selling of debtors to a third party)

• This generates cash
• It guarantees the firm a percentage of money owed to it but will reduce income and profit margin made on sales.
• COSTS INVOLVED IN FACTORING CAN BE HIGH

6) Credit control

• Establishing credit limits for new customers, credit checking new and existing customers, setting realistic credit limits, monitoring the age of debts and chasing up and chasing up bad debts, determine appropriate terms and conditions for credit and chasing up debtors will get payment in sooner but may upset customers.

7) Trade creditors  (amount owed to suppliers for goods supplied on credit and not yet paid for)

Delayed payment means that the firm retains cash longer.

Have to be careful not to damage firm's credit reputation and rating.

Trade creditors are seen (wrongly) as a "free" source of capital 

Some firms habitually delay payment to creditors in order to enhance their cash flow - a short sighted policy and raises ethical issues.