Firms grant credit to customers as a way to increase sales. However, granting credit also exposes...

Firms grant credit to customers as a way to increase sales. However, granting credit also exposes the firm to the risk of uncollectible accounts. List and describe three actions a firm can take to reduce the risk of bad debt expense. For each action listed, describe the potential costs involved with these steps.

Expert Solution

1.Appointment of Recovery agent/Factoring

The most practical way to reduce or minimize the risk of bad debt is appointing a factor. Make a clarity about the terms with agents both in Recourse and non recourse factoring.Always try to convince the factor to reduce the recovery period to earlier as possible with best economical fees.In other words net savings will be always more than the cost to be incurred for the service.

2.Discount Scheme
Another kind of attractive way to reduce the risk is to introduction of discount scheme. Customers should be provided with cash discount for payments on or before a predetermined date.

3. Intimate the credit terms & Charge a fee for late payment.
Late payment fees should be properly explained in your agreement and on every invoice you send to customers. In good communication, make understand your customer that you will charge interest and any or all recovery and legal fees incurred because of late payment.

ekkarill92 answered 1 year ago

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