What is Collection Policy | Gaviti (2024)

A collection policy is an official strategy your business uses to meet and exceed its accounts receivable goals. This written document includes clear and detailed guidelines identifying who to extend credit to, how much, and why. It also includes the protocol for tackling owed debts. These guidelines make it easier for the sales department to work closely with accounts receivables to maintain liquidity.

What Should Your Accounts Receivable Collections Policy Include?

Before tackling your accounts receivable collection policy, it’s important to determine whether your debtors are individuals or corporations. This creates a significant difference in how you approach the collections process. It’s easy to run afoul of consumer protection laws when pursuing debts, so be sure to seek legal advice before proceeding. There are fewer regulations regarding the pursuit of corporate debts.

These are the basics of what your plan should include:

1. Criteria for good credit
2. When and how often to contact debtors
3. When to escalate collection efforts
4. When and whether to turn to collections agencies
5. When and whether to turn to litigation
6. When to write a debt off as bad debt

Why Is It Important To Have a Written Credit and Collection Procedure?

The more information your workers have, the better their ability to make sound decisions that feed the bottom line. It also reduces the likelihood of using gut feelings and quick guesses to determine creditworthiness. While this sometimes works out for the best, it exposes businesses to a great deal of risk.

Here are some additional benefits to keep in mind:

• Ensures cohesiveness between the sales, accounting and management departments
• Ensures continuity in the business even if key members leave the credit or sales departments
• Facilitates consistency in operations
• Provides effective training tools for new workers in sales, accounting and management
• Reduces the likelihood of personal biases influencing business decisions
• Sets a reliable benchmark for credit extensions to meet

When Should You Update Your Debt Collection Policy?

It’s important to remember your collection policy in receivable management is not a static document. The economy, the market and your clients will change, so the document should reflect that. These are some important factors to plan for or that may necessitate a full overhaul of the document:

• Bad debt incident: If your company faces a serious bad debt incident, it’s time to review the lending and collections practices that contributed to things getting as bad as they did.
• Document anniversary: Ideally, review the document annually and make necessary changes based on accounts receivable performance for that year.
• Economic downturn: If the economy has taken a turn for the worst, it’s time to tighten up on lending practices. Determine whether this will affect existing clients.
• Litigation: If your company faces litigation for unfair or prejudiced treatment of customers, you might change your policy to reduce the risk of recurrence.
• Marketing changes: If your marketing team changes the demographics or promotions on the table, you might need to change your policies temporarily or permanently to reflect this.
• Sustainable initiatives: If you intend to support specific demographics or certain causes, you might have different credit and collections practices in place for these customers.

When Should You Outsource Collections?

At some point, you may consider selling the debt to external collectors. Your accounts receivable team has an interest in maintaining business relationships. External collectors do not. They may call and harass customers excessively to recoup their money, which can reflect poorly on your business. External collectors will also generally pay much less than the debt value to offset their risk and ensure they make a profit.

Automated collections is a much better alternative to consider before turning to litigation or collection agencies. While it does not guarantee payment, if employed from the very beginning of the credit process, you can streamline and automate your credit and collections process. Then, you can put it into action.

Find out how Gaviti can help you achieve this and so much more. Book your free demo to get started.