What should be included in a debt management policy for businesses?

23 January, 2024 | TNTP LAW | Debt collection

The question “What should be included in a debt management policy for businesses?” often arises among companies seeking to establish an effective framework for controlling cash flow, maintaining liquidity, and mitigating financial risks associated with accounts receivable. A well-designed policy not only outlines clear debt recovery procedures but also defines responsibilities, authorities, and coordination mechanisms among departments. The following article by TNTP provides an in-depth analysis of the key elements that should be included in a comprehensive and practical debt management policy.

1. What Is a Debt Management Policy?

A Debt Management Policy is an internal document that sets out the principles, processes, and responsibilities for monitoring and managing a company’s receivables. It serves as an internal governance tool that standardizes and clarifies debt collection procedures while ensuring compliance with the law. This policy helps protect the company’s financial interests and minimize legal and credit risks.

Key benefits of adopting a debt management policy include:

Effective control of cash flow;
Prevention of losses due to poor internal control;
Enhanced liquidity and working capital efficiency; and
Establishment of a legal foundation for litigation when necessary.\\

2. Key Contents of a Debt Management Policy

A comprehensive debt management policy typically consists of three key components: (i) managing and classifying debts, (ii) establishing a debt handling process, and (iii) setting out debt recovery principles. Implementing these three elements enables businesses to maintain financial discipline, address overdue debts promptly, and minimize risks arising from late-paying clients.

2.1 Managing and Classifying Debts and Debtors

The first step in a debt management policy is to classify debts and debtors based on specific criteria.

For debts, companies should categorize them according to four main factors:
(i) time incurred, (ii) amount owed, (iii) payment status, and (iv) risk level. This classification facilitates planning for appropriate recovery strategies.
For debtors, businesses should assess financial capability, cooperation level, payment history, and available collateral.

This approach helps prioritize debts with higher risk of default while assigning specific monitoring mechanisms to each debtor category. High-risk debts or uncooperative debtors, legal measures should be initiated early. Conversely, for small-value debts or cooperative debtors, flexible negotiation such as installment plans or interest reductions may be applied. Proper classification allows companies to optimize resources, focus on recoverable debts, and reduce costs associated with uncollectible accounts.

2.2 Debt Processing Procedure

The debt processing procedure is the core pillar of a debt management policy, defining the steps from the moment a debt arises until it is recovered or written off. A typical process includes:

Step 1: Send a payment reminder notice when the debt becomes due.
Step 2: Contact the debtor directly via phone, email, or official letter to confirm the payment status.
Step 3: Negotiate repayment terms and prepare a debt reconciliation record or written payment commitment.
Step 4: Transfer the case to a professional debt collection agency or legal counsel if the debtor remains uncooperative.
Step 5: Initiate legal action through the Court or Arbitration.

Each method differs in cost, timeframe, and success rate. Therefore, businesses should carefully evaluate both economic efficiency and the potential impact on client relationships before selecting an approach.

2.3 Principles of Debt Recovery

Debt recovery principles are established to ensure that all collection activities are conducted lawfully, professionally, and transparently, without damaging the company’s reputation. A sound debt management policy should clearly define the following principles:

Compliance with civil, commercial, and data protection laws when dealing with debtors;
Confidentiality of debtor information; no use of force, threats, coercion, or any actions that may harm the debtor’s honor or dignity in the debt recovery process;
Accurate and complete documentation at every stage of the debt process.
Close coordination among departments to ensure recovery efficiency.

Strict adherence to these principles helps minimize legal risks and maintain a company’s professional image in all business dealings.

3. How to Implement a Debt Management Policy Effectively

For a debt management policy to be effective, businesses must implement it consistently and practically.

First, establish a dedicated debt management unit responsible for monitoring and consolidating receivables data;
Second, provide training for staff on communication, negotiation, dispute handling, and legal compliance. The use of debt management software can automate tracking, reminders, and risk alerts, reducing human error and improving efficiency;
Third, regularly review and update the policy based on business performance, market changes, and regulatory updates. Evaluation reports should analyze debt recovery rates by method, cost-benefit ratios, dispute statistics, and procedural bottlenecks.

4. Common Mistakes in Debt Management

In practice, many companies struggle with ineffective or poorly implemented debt management policies. Common mistakes include:

Failure to classify debts and debtors clearly: Some businesses only track total outstanding amounts without analyzing debt age, value, or customer profile. As a result, resources are wasted on small, low-recovery debts while major high-risk debts are neglected.
Lack of interdepartmental coordination: In many enterprises, the sales department often prioritizes maintaining customer relationships and, as a result, is reluctant to apply pressure for debt repayment. Meanwhile, the finance department tends to focus primarily on numerical data without a comprehensive understanding of the debtor’s actual situation, and the legal department is frequently not provided with sufficient information to prepare litigation or recovery documentation. Accordingly, a debt management policy should clearly define coordination mechanisms among relevant departments to ensure regular review of outstanding debts, unified decision-making on recovery measures, and clear allocation of responsibilities to each unit involved.
Delayed response to overdue debts: The longer the delay, the lower the chance of successful recovery, leading to bad debts.
Violating legal or internal rules: Breaches of law or internal policies during the debt recovery process, such as using threatening language, applying psychological pressure, or publicly disclosing debtor information on social media, pose significant risks to the enterprise. Such actions not only constitute legal violations but also seriously damage the company’s reputation.

Recognizing and addressing these issues early allows businesses to stabilize cash flow and strengthen financial management capacity.

A Debt Management Policy is not merely an internal guideline – it is a legal safeguard that protects the company against credit risk. Building and properly enforcing such a policy enables businesses to maintain financial control, preserve credibility, and ensure long-term sustainability.

This article by TNTP aims to clarify what should be included in an effective debt management policy for businesses. We hope it proves useful to your organization. Should you require further assistance, please don’t hesitate to contact us.

Sincerely,

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