The collection policy of a firm is intend at timely collection of overdue amount and comprises of the subsequent.

a.      Monitoring the state of debtors (account receivable)

b.      Reminders

c.       Personal letters

d.      Telephone calls

e.      Personal visit of salesman

f.        Restriction of credit

g.      Use of collection agencies

h.      Legal action.

A rigorous and efficient collection program tends to reduce sales, shorten average collection period, decrease bad debts percentage and raise the collection expenses, while a lax collection program will have just the reverse effect.  The consequence of decreasing the collection effort on net profit can be evaluated with the equation 4.

? NP = [ ? S (1-V) - ? BD] (1- t) - k ? I

Here ? BD = raise in bad debt cost

? I = raise in investment in receivables

? I = ? I = (ACP_n - ACP₀) [S₀/360] + V(ACP_n)( ?S/360)

?BD = b_n (S₀ +?S) - b₀ S₀