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7–18 Preapprove Customer Credit
the collections staff may make unnecessary phone calls to customers who have
already paid, which is a waste of time. How can one eliminate this problem?
The easiest method for consolidating all incoming payments is to have them
sent to a lockbox, a mailbox that is maintained by a company’s bank. The bank
opens all incoming envelopes, cashes all checks contained therein, and then for-
wards copies of the checks to a single individual at the company. The advantage of
this approach is that if all customers are properly notified of the address, all checks
will unerringly go to one location, where they are consolidated into a single packet
and forwarded to the cash application person at the company. By sending a single
packet of each day’s receipts to a single person, it is much easier to ensure that the
packet is routed to the correct person for immediate application. However, there
are two disadvantages that must be considered. One is that there is a one-day delay
in routing checks through a lockbox, which translates into a one-day delay in
applying the cash. The other problem is that all customers must be notified of the
change to the lockbox address, which usually requires several follow-up contacts
with a few customers who continue to send their payments to the wrong address.
Despite these restrictions, a collections staff that suffers from mislaid check pay-
ments should seriously consider switching to a lockbox solution.
Cost: Installation time:

7–18 PREAPPROVE CUSTOMER CREDIT

The collections staff suffers severely from credit that is granted after the sales
force makes a sale to a customer. The typical situation is that a salesperson finds a
new customer and makes an inordinately large sale to it; the salesperson then
badgers the credit department to grant a large credit limit to the customer since
there is a large commission on the line. The credit staff yields to this pressure and
allows more credit than the supplier’s credit history warrants, resulting in a diffi-
cult collection job for the collections staff. The answer to this quandary lies in
fixing the credit-granting process well before the collections staff even knows the
new customer exists.
An outstanding best practice for those companies that want to avoid bad debt
situations is to work closely with the sales staff to create a ‘‘hit list” of new cus-
tomer prospects before any sales effort is made to contact them. The credit staff
then reviews existing credit information about these customers, which is easily
gleaned from credit reporting agencies, and calculates the credit levels that it is
comfortable granting. These credit levels are given to the sales staff, which now
knows the upper limits of what it is allowed to sell to each customer. This
approach greatly reduces the pressure that salespeople are wont to bring on the
credit staff for higher credit limits. A major by-product of this process is that the
collections staff no longer has to deal with inordinately high accounts receivable
with customers who have no way of paying on time.