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Managing Debtors
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Debtor’s Selection represents a company’s extension of credit to its customers.
The importance of effective debtor management was illustrated in the previous section on the cash conversion cycle. Management of debtors are focused on two areas, namely credit policy and collection policy.
Credit Policy
Credit selection involves whether to extend credit to a potential customer, and once approved, what amount of credit to extend. Credit standards are the minimum requirements for extending credit to a customer. Credit terms specify the repayment requirements set for customers and covers cash discount, cash discount period, and the credit period.
Collection Policy
The collection policy involves procedures used for collecting outstanding amounts from debtors once they are due.
Types of collection techniques are:
- Reminders on statements (PLEASE! stickers)
- Letters (polite, demanding, threatening)
- Telephone calls
- Personal visits
- Legal action
- Collection agencies