When a customer stops taking cash discounts, it may mean only that a new payables person is not aware of the discount and just needs a reminder from the company in order to start doing so once again. However, a more likely scenario is that the customer’s financial condition has declined to the point where it no longer has the cash to make an early payment.
Not taking early payment discounts is an excellent early warning of a decline in a customer’s financial condition. If the cash application staff notices this change, they should notify the credit manager at once, who can reevaluate the customer’s credit limit.
The real problem with this best practice is noticing when cash discounts stop. Unless a customer’s payments are so large that their absence is clearly noticeable, there is not usually an automated way to note their absence. Instead, it may be necessary for a manager to regularly compare a list of customers who usually take discounts to the accounts receivable aging. Though this manual approach can be time-consuming, it can save the company from incurring a bad debt loss. This review should be conducted by a credit or collections person, on the grounds that they have the largest vested interest in spotting this problem as early as possible.