Accounting Best Practices, Fifth Edition

7–15. Arrange for Automatic Bankruptcy Notification

The collections department can be completely blindsided by a sudden drop in the credit rating of a customer, possibly resulting in bankruptcy and the loss of all accounts receivable to that customer. Though a company can track payment histories over time, talk to other suppliers of a customer, or periodically purchase credit records from a credit analysis group, all of these options require a continual planned effort. Many collections departments do not have the time to complete these extra tasks, even though the cost of being blindsided can be very high. They just take the chance that customers will continue to be financially stable.

Rather than undergo the embarrassment of losing an account receivable through the sudden decline of a customer, it is better to arrange for automatic notification of any significant changes to the credit standing of a customer. To do this, a company can contract with a major credit rating agency, such as Dun & Bradstreet. This organization can fax or e-mail a notification of any changes to the status of a customer, such as a change in the speed of its payment, adverse legal judgments, or strikes, which may signal a decline in the customer’s ability to pay its bills. With this information in hand, a credit manager can take immediate steps to shrink a customer’s credit limit and put extra emphasis on collection efforts for all outstanding accounts receivable, thereby avoiding problems later on, when ...