How does collection policy relate to sales? What problems may result from too strict of a collection policy?

Answer 1

Credit Policy

A credit policy is the blueprint used by a business in making its decision to extend credit to a customer. The primary goal of a credit policy is to avoid extending credit to customers who are unable to pay their accounts. Your credit policy has a direct effect on the cash flow of your business. A credit policy that is too strict will turn away potential customers, slow sales, and eventually lead to a decrease in the amount of cash inflows to your business. On the other hand, a credit policy that is too liberal will attract slow paying (even nonpaying) customers, increase your business's average collection period for accounts receivable, and eventually lead to cash inflow problems. A good credit policy should help you attract and retain good customers, without having a negative impact on your cash flow.