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The purpose of a Debt Collection Policy

The Purpose of a Debt Collection Policy

The purpose of a Debt Collection Policy is to reduce bad debt!

The purpose of a Debt Collection policy is to document the processes and procedures that all staff must follow to ensure accounts receivable are collected in a timely, fair and cost effective manner.

If these procedures are followed, there should be no accounts reflected as ‘Receivable’ for over 30 days overdue without valid, documented reasons.


Include a section that spells out the specific roles and responsibilities of the Owner and / or senior management team, and accounts receivable staff. And determine the point at which each is engaged to pursue the collection of an overdue account.

For example: current accounts up to 45 days is the responsibility of Accounts Receivable, 45 to 90 days the owner or senior manager takes over. Anything over 90 days goes immediately to a Debt collection agency.

However, if:

  • A customer is non responsive to your collection letters and phone calls
  • A customer tells you they are unable to pay
  • A customer will not work with you to develop a payment schedule
  • You can no longer contact a customer — they’ve moved and left no forwarding address
  • They’ve gone out of business, or their phones are disconnected
  • A customer has promised to pay on several occasions but payment has not been received
  • A customer continues to delay payment by using diversionary tactics
  • or other information comes to hand that indicates that you are not going to get paid

then you should not hesitate in firstly closing or suspending their account, secondly engaging a Debt Collection agency to act on your behalf.

They may claim they never received your invoice or shipment, tell you they don’t agree with your payment terms and conditions, or use other excuses to avoid paying altogether.

The longer you wait for your money the less chance of recovery


When all staff know and understand the purpose of a Debt Collection Policy, the exposure to bad debt should be minimal. Only when all staff (that’s owners, managers, front counter, sales, delivery and stores) know and understand that a sale is not a sale until the money is in the bank, then this process can be applied throughout the sales cycle and entire lifetime of the customer.

  • Sales Reps and point of sale staff: So often bad debts occur as a result of sales staff, who are either too afraid to say no, or who are sales target oriented, and “she’ll be right mate” s/he’s looks honest. In many cases the point-of-sale / counter staff are (or are considered to be) too under skilled to handle stop credits on the shop floor.
  • Stores / delivery staff: let goods exchange hands because “it’s none of their business”.
  • Owners / bosses: can be as bad. If not worse, when seen to override the accounts department stop credit “S/he’s been a great customer for years” – yeah right!

The primary purpose of a Debt Collection Policy is that each member of staff knows and understands the Credit Control / Debt Collection policy, including a payment timetable, no customer should ever get past 30 days.

Consider this.

If you delivered an order 30, 60 or 90 days late, what would your customer have done?
Exactly, what customer! So why is it any different when the shoes on the other foot?

Establish a Credit Evaluation Process

Establishing a process for assessing credit risk and determining credit limits is critical to managing Accounts Receivable and avoiding bad debt. Don’t rely solely the customers word to make these decisions, for example your assessment process should include:

  • Industry groups
  • Why credit checks are worth doing and Credit bureau reports as well as a search on Insolvency Watch
  • Financial statements and year end reports – don’t be afraid to ask for them
  • Public records
  • Other information obtained directly from the applicants

Don’t confine your assessment to ‘Known Problem Payers‘, after all many of these were probably once considered to be “Good”. Set a time table to review and assess all of your customers, it doesn’t mater how large your customer base is.

By establishing a credit evaluation process and applying it regularly you can monitor any changes in the risk level of your Accounts Receivables. If you have been in business, or the industry, for a while you should be able to recognise seasonal variances and therefore adjust your credit and collection policy accordingly.

This process should also include the parameters / rules for when it is necessary to review a customers credit limit based on changing levels of creditworthiness.

Terms of Trade

If you don’t have a purpose written “Terms of Trade” you shouldn’t be in business. A purpose written Terms of Trade should protect your rights, limit your liabilities and provide security in the transaction.

If your Terms of Trade are:

  • More than 3 years old
  • Not written specifically for your trading entity / activity IE borrowed from another business or internet
  • Not written by a specialist Credit Lawyer, or
  • Your business has fundamentally changed since last written / reviewed

Then your cash flow is at risk.

Click here if you would like Shark Patrol to write your Terms of Trade specifically designed to suit your unique needs

Time Table

Another purpose of a debt collection policy is to clearly outline a payment timetable. Each company, each industry has an established payment timetable. Be it cash on delivery, 7, 14 or 21 days, 20 th month following, whatever it is for your industry, establish a payment timetable that suits you and your customer base.

Use the following Payment Timetable as a guide.

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