CHAPTER 4: CREDIT MANAGEMENT
Cash in Advance (CIA): This method requires the invoice to be prepared in advance and sent to the customer for payment. This can be used when the item sold is personalized, or in cases of extremely poor credit. Cash on Delivery (COD): This method also requires the invoice to be prepared in advance and sent with the transportation company so the transporter can accept the payment before delivering the product. This method is difficult for both the company and the customer. Producing the invoice in advance is usually a manual process and error-prone. Since most AP departments were not involved in the ordering process and may be in a different location, the transportation company often leaves without payment and does not deliver the product. For example, after three failed attempts, the transportation company will return the product. This can be a very costly and ineffective method. Letter of Credit (LC): An LC is used mostly for offshore payments because it protects both parties— the bank pays when certain conditions are met. There are risks: payment is not guaranteed, there are bank fees, the product might get delivered before the LC is complete, there could be delivery problems (such as the buyer walking away from the deal when product is already out of country and it is too costly to return), and—even though rare—the bank could go out of business. Be aware of issues in regard to cash in advance (CIA), cash on delivery (COD), and letter of credit (LC) terms. Billing must create an invoice in advance for the customer to process the payment. This invoice could be lacking the appropriate shipping costs, special handling, or other charges. This can be addressed by sending out an estimate in advance and then sending a separate invoice for other charges after delivery, but you risk not getting these extra charges paid, especially if the customer puts a paid-in-full endorsement on their check. The best practice is to use a credit card. If you insist on CIA or COD, and in some cases LC, the customer may choose to buy from a competitor or just not carry your product. It can be viewed as insulting, and also creates process problems for the customer’s AP department. Credit Card (CC): This is becoming a best practice for many companies. Use of a credit card is a win-win for both parties. The customer can get the product or service they need and pay on their next credit-card statement within a billing period average of 45 days, while the seller receives a preapproval from the credit card company thereby guaranteeing payment in just two to three business days. However, this could be a costly method for the customer depending on the interest charge—and for the seller depending on the cost of points (transaction fees) for processing the credit-card payment. The processing cost, however, can be built into the price. Credit cards are highly used in B2C and are an acceptable method of payment by both parties. For customers that pay slowly, if your terms are 2%10 net xx, why not accept a credit card payment or the various Payment Exchanges (see Chapter 5, Cash Application) to receive the cash in two to three days? Instead of 2 percent off the invoice to the customer, pay the points to the credit card company. There is a value to cash-in-hand vs. 30, 45 or 60 days late. Consult with your financial controller.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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