Memo Report on Bad Debts
Fazal Department Stores
Date: May 2, 20___
To: Mr. Abdul Malik, Director
From: Masood Ahmed, Manager Finance
Subject: STUDY ON INCREASING BAD DEBTS
THE PERSPECTIVE OF THE PROBLEM
The company after its expansion has been suffering the crisis of bad debts due to poor debt management. The top management has been shirking its responsibility to form a sound policy of credit sales. The bad debts have been consistently fluctuating between five to tell percent of the net sales bringing a great decline to the incoming revenue. As a result, the company has to borrow funds from financial institutions on hard terms.
It is downright incomprehensible to me as to why the management has ignored and has been indifferent to the seriousness of the problem.
CAUSES OF THE PROBLEM
After going deep down the problem I have found that the following are the causes of accumulation of bad debts.
Poor credit policy
The company’s credit policy has not been properly devised and docs not trim to the need of time. There is no discrimination between old and new customers all are treated alike whether they are new, old, big and or small customers in respect of credit facilities.
Lack of investigation
It is a well established principle that before allowing credit sales to customers their character and financial soundness must needs be investigated and analyzed. But the company sounds to be indifferent to take such trouble. This cause is sorely damaging company’s net profit.
Poor collection policy
The company has not follow up system in the collection of debts. The company does not keep in touch with such customers either personally or through telephone and letters. This negligence gives latitude and encourages them not to make payment in time or to prolong it indefinitely.
To rid the problem the company should forthwith discard the existing policy before it is too late. The following remedial measures will enable the company to solve the problem.
Before allowing credit sales, an inquiry into the financial position of customers will help the company make right decisions. The company should also look into paying practices and the past records of file customers companies.
Fixation of upper limit
The company follows the policy of allowing credit sales without any constraint and limit. This practice should now be abandoned. The company should classify its customers into several ranks and categories for the purpose of a maximum limit for every class. This policy will help the company, check the bad debts.
Bonus and other schemes
After tightening the liberal credit policy, the sales volume is likely to fall by some percentage. This deficiency may be replenished by introducing some promotional schemes. Bonuses and discounts on cash sales will attract a good number of customers. Instead of depending on credit sales the company should develop new segments of the market by offering them lucrative cash and quantity discounts and other services of value to the customers. By adopting this measure not only will the number of customers heighten but also the company will manage to get over the problem of obscene profits resulting from excessive bad debts.
5 C’s of credit management
The company should follow the 5 C’s of credit management which stand for capital, character, capacity, collatered, and condition.