2015, Question 3 (C)

Explain the methods a business could consider to minimise the risk of bad debts as part of its credit control system. (20 marks) [Marking scheme: 7 marks (4 + 3) + 7 marks (4 + 3) + 6 marks (3 + 3)]

Assess the creditworthiness of customers:

The business vets each customer carefully to see whether or not they can be trusted with credit. This can be done by running a credit check on the customer, asking them in for an interview, asking for references from banks or previous people they have done business with or consulting with Stubb’s Gazette.

In this way, the business will be able to assess if the customer is able to repay them the money owed to them, therefore, minimising the risk of bad debts.

Impose a policy for late/partial payments:

The business must have a collection procedure for getting money from customers who won’t pay. This can involve ringing them up, calling out to them, adding interest to their account, or taking them to court.

This type of system will act as an incentive for customers to pay on time, as through adding a fine for a late payment, it will increase the cost of the purchases for the customer.

Offer incentives for prompt payment:

When customers use their credit, their bills (invoices) should be sent out immediately. They should be offered a discount if they pay early to encourage them to pay quickly. This means a good administration system is imperative.

This will work as an incentive for customers to pay on time as a discount on the cost of their purchase will decrease their overall costs and increase their profitability.