Is your Collections staff using these 3 key ratios?
Whether you’re considering extending a credit line to a brand new customer, or thinking about upping the limit for a regular one, this tactic should help you decide if it’s a good idea.
Here are three ratios many Collections departments are leaning on to determine the creditworthiness of customers — both old and new:
- Current ratio = Current assets/Current liabilities
- Total debt ratio = Total debt/Total assets, and
- Profit margin = Net income/Sales.
Just how many A/R departments incorporate these ratios in credit assessments? According to an April poll by the National Association of Credit Management, 61% of businesses include these accounting ratios when it comes to assessing the financial health of prospective customers.
In addition, these ratios are a great tool when your A/R staff is doing their annual reviews of current customers — and may help to predict some problems down the road.
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