former phrase leaves a great deal to the customer's imagination, but the latter does not, and he will invariably resent the threat and prepare to defend himself as best he can. Of course, if he is scared at the threat he will pay, but very few are scared at such a threat when this stage of operations has been reached.

The really good collector or correspondent should study his customer, and should know or try to learn something of his station in life, his business or occupation, his habits of living, buying, paying and thinking. To do this and at the same time handle a large volume of correspondence requires the smooth operation of an adequate system.

Retaining the Good-Will of the Customer. One main thought must be uppermost in the minds of the credit manager and the collector when an attempt is being made to collect the account and still retain the good-will of the customer. It is one of the greatest secrets to successful collecting. It is so simple that most collectors never even think about it, but mechanically continue their humdrum methods of annoying perfectly good customers to no constructive purpose; but more frequently destructive. In determining a man's credit standing, the problem is reduced to three general questions, always to be asked and answered. In collecting the problem is reduced to one general question. When an account is overdue and unpaid, the question should be asked "Why?" Then steps to find out "Why" should be taken. And in finding out "Why," a study should first be made of the account, the records of the transaction, the credit records of who the customer is, what he has and his previous reputation for paying obligations, and then the correspondent should draw upon his imagination, by putting himself in the customer's place, and then acting accordingly.

Relation of Collection Policy to Financial Success.Collecting the account at maturity and retaining the customer's good-will is the goal after credit has been extended. The efforts of all other departments of a business organization are rendered useless and of no effect if the collection department fails to collect accounts. It is not enough to collect the accounts sometime; they must be collected with reasonable promptitude, if the working capital of a business is to function properly and profitably.

The principal source for replenishing the bank balance of a business is the accounts receivable. If accounts are collected promptly the bank balance should, if a business is properly financed, be adequate to permit discounting bills, which frequently plays an important part in the profits. Capital tied up in overdue accounts means capitalizing the other fellow's business to the amount of overdue accounts, and denying your own business the active use of just that much capital and profitearning power.

In order to keep informed as to the progress of collections it is very helpful for the collection manager, or the credit manager, to study some of the financial ratios in the computation of which the accounts receivable have been included as one of the items. The ratios which may be useful in this connection are as follows:

Current Assets to Current Liabilities

Receivables to Inventory

Total Current Assets (proportion of total assets which are current)

Sales to Receivables

These ratios have all been discussed in the chapter on Financial Ratios so that it is not necessary to go into detail here regarding each one.

It depends entirely upon the nature of the business as to

how the total assets are to be proportioned. If an adequate analysis has been made of the industry so that a norm has been determined for that industry it is very easy to see whether or not the total current assets ratio is rightly proportioned. If it is found that the proportion of fixed assets is excessive steps must be taken to reduce the amount of fixed assets. In other words, it may be found necessary to make some changes in the sales policy or in the collection policy in order to approximate the norm which has been worked out. If no detailed study has been made of the industry the individual concern must make an approximation of the distribution of its assets which will be satisfactory to its particular requirements, and policies must be formed which will serve to keep the business within those limits.

Since the total current assets are to a large extent made up of accounts and notes receivable it is essential to know how this ratio fluctuates. If a fluctuation occurs it is very likely caused by some change in the accounts or notes receivable, and for that reason it is the duty of the credit department and the collection department to keep informed as to such changes.

The sales to receivables ratio is the most important of all financial relations in showing, first, the rapidity with which collections are made, and, second, the efficiency of the collection department in keeping the accounts receivable down to the limit which is determined by the sales policy of the house. It is necessary to know the terms of sale of a concern in order to ascertain what the amount of the receivables should be. If the terms of sale are "30 days" the amount of the receivables carried on the books at any one time, theoretically, should not exceed 30 days' sales. The ratio may be expressed in one of two ways. It may be stated as a 1200% turnover of receivables, or as 30 days' sales. Expressing it in terms of days' sales makes it easier to read and for collection purposes it should be so stated. Chapter XIII shows how such ratios may

be interpreted. A glance at these figures will show the collection department whether or not the collections are keeping the receivables within the margin as laid down by the terms of sale.

Every concern has a more or less clearly defined financial policy. If success is to be attained it is necessary that all other activities must conform to that policy. The terms of sale must be such that they will reflect it, and collections must be made accordingly. If the receivables are too high it means that the concern is financing its customers with its own funds. The principle is the same as if that amount of money were loaned directly to the customer, the only difference being that in the latter case interest would be received for the use of the funds, while usually in the other no interest is collected. For these reasons emphasis must be placed upon following up collections very closely so that the financial structure of the business will not be endangered.

REFERENCES

Ettinger, Richard P. and Golieb, David E. Credits and Collections, Chap. XIV. New York, Prentice-Hall, Inc., 1917.

Hagerty, James E. Mercantile Credit, Chap. XII.

Prendergast, William A. Credit and Its Uses, Chap. XVI.

CHAPTER XX

COLLECTION PROCEDURE

Organization of the Collection Department. Before an efficient system of collections may be evolved, it is necessary to formulate a definite collection policy that may be stated briefly to the buyer as the "policies of the house" in order that there be no misunderstanding at the time of the initial sale. These policies must define the terms under which the sale is made, emphasizing the date upon which payment becomes due; they must determine in general the bases upon which credit is granted, thus defining that house as liberal or exacting in its credit extension; they must define the limits beyond which an account becomes delinquent and open for collection follow-up.

In the technical task of collecting accounts there are certain fundamental principles which correct management dictates. First, the house should have a definite collection routine which it employs, with slight modifications, in each case of delinquency. Reminders of indebtedness must be prompt and regular. Some form of collection effort should be made at such intervals as the house policy has determined, thus establishing for the house the valuable habit of expecting payment within the stated interval, and leading the debtor to respect the habits of the house. Second, the plan should be so constructed as to enable the house to adjust that policy to the particular case in hand-it should be flexible. To make this adjustment, the collection manager should analyze the facts at hand and come to that decision which will be to the best interest of his house in each case.

The systems employed in keeping informed as to the