What is a collections policy?

A collections policy is a documented procedure that outlines how a business will manage overdue accounts and the efforts involved in collecting debts from customers. This policy serves as a framework for the company's collection practices, detailing the steps to follow when accounts become delinquent. It typically includes guidelines on communication with customers, payment arrangements, escalation processes, and legal actions that may be undertaken if necessary.

The collections policy plays a crucial role in maintaining healthy cash flow and minimizing losses from bad debts. By having such a policy in place, businesses can ensure consistency in their approach to collections, protect relationships with customers, and adhere to any relevant laws and regulations regarding debt collection. This structure helps in setting clear expectations for both the organization and its customers regarding payment obligations and the consequences of non-payment.