The cost of offering credit to customers is made up of three components:
- Time value of money
- Bad debt losses
- Cost of credit and collection functions
The cost of NOT offering credit to customers is lost sales and the gross profit that would have been earned on the lost sales. Most companies offer credit because otherwise they would not be competitive.
The cost of granting credit can be substantial. It is important to understand and manage the components of the cost of credit to minimize the cost of your credit and collection activities. Here are some suggestions for managing the cost of credit.
Time Value of Money
The credit your company extends to customers creates accounts receivables which must be collected to be converted into cash. The time value of money is the cost to your company of financing accounts receivable until they are converted into cash.
The cost to finance accounts receivable during allowed terms such as Net 30 should be evaluated based on your company’s cost and ability to finance accounts receivable. The cost of financing accounts receivable paid late or beyond your allowed terms, which can be expressed as: (cost of money APR%/365) x (amount late) x (days late), should be minimized with credit and collection practices.
Automated credit and collection solutions can help you minimize the cost of credit. Anytime collect has a number of features which can alert your team to customers costing you the most including:
- Credit dashboard with the cost of credit and days past due displayed for easy reference
- Alerts which can be programmed for:
- Cost of credit more than X
- Average days late is now more than X
- Customer is on credit hold
- More than X broken promises in past six months
- More than X disputes in past 6 months
Bad Debt Losses
Bad debt losses can be minimized by monitoring credit risk and effective collections. Lockstep Collect has credit management solutions which can help you minimize bad debts including:
- Custom credit scoring of factors that are the best indicators of your customers’ credit quality.
- Dashboard reporting of custom credit score, days past due, available credit, credit agency scores, and whether an account pays late or on time and by how many days
- Color scale ranking of credit quality which pops up when searching for a company in Lockstep Collect
Cost of Credit and Collection Functions
Automated credit and collection solutions can help improve efficiency and reduce the cost of credit and collection activities. Lockstep Collect has automated credit and collection solutions that span the accounts receivable transaction cycle including:
- Automated invoicing
- Credit management with dashboard reporting
- Automated customer communications
- Activity management to assist collections
- Business intelligence tools
- Online collections and customer payment portals
- Automated accounts receivable sequences
Lockstep Collect, a leader in cloud-based credit and collection platforms, provides automated solutions for managing credit. Lockstep Collect is an experienced software partner that can help you minimize the cost of credit.
If you would like to learn more about how you can benefit from automated credit management solutions, please contact Lockstep Collect at www.lockstep.io.
