CHAPTER 4: CREDIT MANAGEMENT
4.11 Terms and Payment Methods
Be creative and tie methods to best practices. Benchmark new payment methods since these are changing rapidly, especially in the B2C world.
Regarding terms and conditions, a company should strive to have a policy that will promote sales with an open account, versus requiring collateral or payment before shipment. It is best to choose a few different terms in order to cover the business needs and desired process. Sometimes terms are not connected to the financial condition of the customer but rather to the financial condition of one’s own company. If your company is cash poor, then credit card, cash in advance, or cash on delivery may be the only accepted terms. The following points should be considered when developing credit terms: If there is a need to get cash into the bank sooner, use credit card, pay upon receipt or net 10 days terms. If the product is seasonal, ship now/pay later gives the consumer customer an incentive to buy now; if a business customer, it gives them time to sell the product and return what doesn’t sell (e.g., for seasonal products, holiday product sent out six months early). It also gets the product out of your warehouse. If shipping great distances to customers, add days. Consider the terms of competitors. Consider the demand for the product (e.g., grant longer terms if they take the product sooner). Consider whether the company is introducing a new product (e.g., offer extended terms to try new product). For a new company, offer extended terms to get customers to try products and services. Tie terms to pay methods. PAYMENT METHODS Electronic Funds Transfer (EFT): EFT is the best way to receive payments from customers because it reduces the time it takes to receive the payment and it lowers bank and internal processing cost for both you (AR) and the customer (AP). Most customers (B2C and B2B) prefer to pay electronically vs. paper checks. When opening a new customer account, it is worth negotiating payment terms with the payment method being an electronic transfer. Payments and information are transferred securely between financial institutions through the Automated Clearing House network (ACH). Payments can be triggered by the customer (ACH Credit) or triggered by the supplier (ACH Debit). EFT/ ACH is the preferred method for B2C. In order to sell the benefits to B2B you could offer the following: Attractive terms such as 2%10 net 30 for EFT/ACH versus 2%10 net 15 for a paper check. By paying via EFT/ACH, AP can reduce their cost: { Controls related to storing and securing paper checks; { Printing, gaining signatures, preparing the paper check for mailing and postage; { Reduce fraud risk, because most payment fraud occurs with paper checks; { Escheat process—EFT/ACH removes the liability of uncashed checks.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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