Good Customers Improve Cash Flow
Sep 10, 2010
Good customers are customers who pay you on time in accordance with the terms with which you have both mutually agreed. So, how do you determine if a potential customer will be a good customer?
The proper use of a credit application is one tool that can aid in this evaluation process. A good credit application generally asks for one bank reference and three trade references. The bank reference is the most important, particularly if the potential customer has a line of credit.
There are two tests that both must be passed to give a potential customer credit: the willingness to pay and the ability to pay. Without both, you may not be paid on time.
The willingness test is generally passed by the potential customer's willingness to provide the credit application. The ability to pay can be estimated as a percent of the line of credit or as a percent of the average daily balance. The potential customer, of course, must be willing to have the bank release this information for your evaluation.
With these tests passed, the final step is to contact the potential customer's accounts payable department to confirm you are set up for payment in accordance with the terms of sale.
Now you have a customer and you can authorize the order to be entered. Add this sale to your daily cash flow projections and manage this customer so you are paid properly.