Collection Policy

Collection policy refers to the procedures the firm follows to collect past-due accounts. For example, a letter might be sent to customers when a bill is 10 days past due: a more severe letter, followed by a telephone call, would be sent if payment is not received within 30 days and the account would be turned over to a collection agency after 90 days.

The collection process can be expensive in terms of both out-of-pocket expenditures and lost goodwill-customers dislike being turned over to a collection agency. However, at least some firmness is needed to prevent an undue lengthening of the collection period and to minimize outright losses. A balance must be struck between the costs and benefits of different collection policies.

Changes in collection policy influence sales, the collection period and the bad debt loss percentage. All of this should be taken into account when setting the credit policy.