Core conclusions:In managing accounts receivable for domestic trade, two factors need to be considered to determine risk levels. The credit limit for a single customer can be calculated as “average monthly orders multiplied by the number of months of the credit period, then multiplied by 1.2”. If the proportion of accounts overdue for more than 90 days exceeds 15%, it indicates a risk situation. There are still 115 days until the Spring Festival in 2027 (February 6th). The period from October to January of the following year is crucial for collecting payments. If accounts overdue for more than 90 days do not receive a solution by the end of November, it is very likely that the payments will not be recovered before the festival.
1. First, calculate two numbers: the credit limit and the age of the accounts.
The credit period is not a matter of trust, but rather a question of credit limits. The amount of credit granted to a customer should be determined by a specific formula. The recommended formula is: the credit limit for a single customer is equal to the customer’s average monthly order value multiplied by the number of months of the credit period, then multiplied by a safety factor of 1.2. For example, if a customer orders an average of 500,000 yuan per month, with a credit period of 60 days (2 months), the credit limit would be 500,000 × 2 × 1.2 = 1.2 million yuan. Any amount exceeding this limit must be paid in advance before goods can be shipped, regardless of whether the customer is a repeat buyer or not.
The second number represents the age of accounts receivable. It divides accounts receivable into four categories: within 0 to 30 days, 31 to 60 days, 61 to 90 days, and more than 91 days. If the proportion of accounts receivable exceeding 91 days exceeds 15%, or if the total receivable from a single customer exceeds 25% of that customer’s annual order volume, it indicates that the management of these accounts has become unmanageable. These numbers don’t require any complex systems; simply updating an Excel spreadsheet once a week is sufficient.
| Age group of accounts | Reference range for proportion | corresponding action |
|---|---|---|
| 0 to 30 days | more than 60% of | Normal disbursements are made, monthly reconciliations are conducted, and signatures are kept for confirmation. |
| 31 to 60 days | No more than 25% | Confirm the payment plan by phone, and keep a written record of it. |
| 61 to 90 days | No more than 10% | Pause the issuance of new orders. Instead, arrange for delivery only after the payment is received. |
| More than 91 days | No more than 5% | Send a written reminder to initiate the suspension of services and conduct legal assessments. |
II. In addition to the four levels of account age, customers should also be grouped according to different levels.
The “account age” refers to a time-based dimension, and it should also be considered in terms of customer characteristics. Customers can be divided into three groups based on their annual order values: Group A consists of core customers who order more than 3 million yuan per year and account for less than 30% of the total production capacity; Group B includes growing customers with orders ranging from 1 million to 3 million yuan per year; Group C comprises individual customers with orders below 1 million yuan per year. For Group A customers, payment terms can be provided, but there must be an upper limit on the amount and a monthly reconciliation mechanism must be established. For Group B customers, a payment period of 30 days is generally acceptable. For Group C customers, payments must be received before goods are delivered.
After the stratification process, a seemingly “counterintuitive” behavior becomes apparent: giving the largest customers longer payment periods may not necessarily be beneficial. The reason for this is the risk of concentration—if one customer accounts for 40% of your production capacity, then every additional month that their payment period extends significantly increases your cash flow pressure. Linking the payment period to the level of concentration, rather than to the strength of the relationship between customers, is the first step in effective payment period management.
III. Three Steps for Collection: Each Step Should Leave a Paper Record Behind
The first step is to conduct an account reconciliation. Within 7 days after each delivery, the statement of accounts should be sent to the customer. The customer is required to confirm the information before the next transaction occurs. Many cases of outstanding payments end up becoming bad debts. The root cause isn’t the customer refusing to pay, but rather a discrepancy in the amounts and discounts between both parties. Without proper documentation confirming the terms of payment, it becomes difficult to provide evidence in legal proceedings.
The second step is written collection. When the debt has been outstanding for 61 to 90 days, in addition to making phone calls, a written collection letter must be sent out. The letter should clearly state four items: the amount of the debt, the date the debt was incurred, the agreed payment date, and the specific date by which payment must be made. The collection letter should be sent via courier, along with proof of delivery. The purpose of this step is not to urge immediate payment, but to establish evidence of the “rights already asserted”.
The third step is to cease issuing shipments, while simultaneously taking legal action. If a transaction has been overdue for more than 90 days, and the other party fails to pay twice in a row, then new shipments should be stopped first. After that, consider the following options: if the amount involved is clear and there are no substantive objections from the other party, a payment order can be filed. This method is cost-effective and requires minimal time. However, if the other party may try to transfer assets or have multiple creditors, then litigation should be considered along with requesting property preservation. Do not wait until the other party is insolvent before taking action. By then, even if you win the case, it may be difficult to obtain the money owed.
IV. Three essential clauses that must be included in the contract
The first point is related to the payment period and credit limit terms. Don’t just write “monthly settlement, 60 days”, but instead state that the payment period starts from the date of invoice receipt. The balance due for a single customer should not exceed 1.2 million yuan; any amount exceeding this limit must be paid upon delivery of the goods. This statement clarifies the issue in case of disputes: it indicates that any amount exceeding the specified limit should not be allowed to remain unpaid, thereby clarifying responsibility assignments between parties involved.
The second clause is related to the retention of title. It states that “until the payment for the goods has been fully settled, the ownership of the goods remains with the supplier.” This clause should be clearly indicated on the delivery note and other relevant documents. This clause has been supported by courts in many cases where enforcement actions were necessary. In particular, it makes a significant difference whether the customer can claim to retrieve the goods after bankruptcy or when enforcement proceedings are initiated.
The third clause deals with liability for late payment and the right to terminate the contract. It specifies how the penalty for late payment should be calculated, how many days of delay will grant the seller the right to unilaterally terminate the contract and stop supplying goods, as well as who should bear any reasonable costs incurred during the collection process. With this clause in place, you will have a clear basis for claiming any costs involved in the collection process.
5. Common questions
1. What should I do if the customer is a repeat buyer, and they immediately cancel orders whenever the payment period is shortened?
First, it’s necessary to distinguish between two types of situations where customers may require extended payment terms. The first type involves customers who indeed have financial pressures, but they simply need a longer period for payment. In such cases, solutions include delivering goods in installments, increasing the upfront payment percentage, or using goods as collateral instead of simply extending the payment period. The second type involves customers who are purchasing from multiple suppliers simultaneously, using the option of a shorter payment period in exchange for lower prices. In this case, tightening the payment period can help reduce their workload, while also reducing the risk of bad debts. By considering the cost of not being able to collect the money, and how much business would need to be done to make up for that loss, it often turns out that tightening the payment period is more cost-effective than keeping the order.
2. How should the payment collection window be arranged before the Spring Festival?
According to the schedule for February 6, 2027, which is the Spring Festival holiday: All reconciliations should be completed by the end of November. Any disputed amounts should be highlighted and discussed separately. By mid-December, customers whose payments have been overdue for more than 61 days should be contacted in person or by phone to confirm the payment dates. In early January, efforts should be focused on collecting payments, and any funds that can be collected before the holiday should be secured. After January 20th, both logistics and finance departments will be on leave, resulting in decreased collection efficiency. The overall approach is to “address disputes first, then determine payment dates, and finally focus on collecting payments.” If the order is reversed, time will be wasted on unnecessary arguments.
3. If it’s already considered a bad debt, what else can be done?
There are three important matters to consider. First, it is necessary to verify the statute of limitations. The general limitation period is three years. Any actions taken during this period, such as debt collection, reconciliation, or promises from the debtor to repay the debt, can interrupt the limitation period and cause it to be recalculated. Therefore, any written letters of collection or bank statements that were previously retained are now considered valuable assets. Second, it is important to assess the debtor’s executable assets, including accounts receivable, equipment, and real estate. If necessary, applications for asset preservation should be made. Third, consideration can be given to transferring the claim to a professional agency for collection. The compensation typically depends on the proportion of funds recovered. This approach is suitable for cases where the amount of debt is spread out over many transactions.
For factories engaged in domestic trade, the key to effective accounts management isn’t to write overly strict contracts, but rather to establish a routine process involving three elements: credit limits, age-based risk assessment, and follow-up actions. This ensures that credit granting is based on numerical criteria and follows a consistent pattern each month.
Qihang Zhilian Foreign Trade Research Institute·Let China's intelligent manufacturing industry set sail to sea·Tel: 180-0327-6609
