Five Steps to Keeping Your Accounts Receivable Healthy

Collecting on accounts is critical to your bottom line, so be sure you’re doing it right.

By William Lynott

The first—and perhaps most important—step in maintaining healthy accounts receivable is an unyielding policy against any delays in sending out invoices.

Every day you fail to process and mail an invoice is a day someone else has the use of your money. Whether you depend on an accountant or software to monitor your A/R, it’s important the system’s aging report notifies you of any accounts overdue by 30 days or more (depending on your credit policy) so you can immediately place a call or send out a reminder.

There is no need to be concerned about offending a good customer. Anyone slow paying bills will be hearing from other creditors as well. The more casual you allow yourself to become about collecting money owed to you, the more casual your customer will become about paying you.

Of special importance is red-flagging any accounts 60 days or more overdue. If that comes to 10% or more of your total A/R—you have a serious problem demanding immediate action!

Set Your Expectations

To help avoid burdensome overdue accounts, make sure your credit policy is clearly defined with all new customers, and preferably in writing. Explain when and how you invoice, and when you expect invoices to be settled.

You may want to go with the more or less standard 30-day payment terms, or you may be satisfied with 60 days. You may even prefer to require immediate payment as soon as invoiced. It’s up to you to decide your payment terms.

Whatever your decision, make sure your employees and customers are familiar with it. Loose or unclear credit policies are an invitation to slow-paying customers.

Once your credit policy is clearly defined, it’s important to enforce it uniformly and strictly. A sound credit policy will be of no use unless it’s enforced.

Here are five steps to a structured procedure that will help you collect accounts once they become overdue.

1. Don’t waste any time.

As soon as an account becomes overdue, place a call to the customer. Even a minor delay on an overdue account reduces the chances you will ever get paid—and the longer the delay, the greater the likelihood you will never see your money.

There is no substitute for a personal phone call when dealing with an overdue account. Letters and emails may seem sufficient, but they are too easy to overlook. An initial letter or email may be acceptable—but if that doesn’t result in an immediate response, it’s time to make that call.

First, make certain there is no complaint about your service. Then remind the customer the account is overdue and ask politely if there is an explanation. Sometimes there may be a legitimate reason, such as an overlooked invoice.

Be sure to evaluate your past experience, if any, with the customer. It’s always possible they’re experiencing unusual problems and deserve a little latitude.

If your customer is having cash flow problems, you may want to offer extended payment terms. In that case, make certain your terms are clearly understood.

2. Make sure you understand your customer’s internal procedures.

If your customer is a company, understand every company has different procedures for handling accounts payable. So make sure your invoices are submitted on time and properly routed.

When you are following up on a late payment, talking with someone who handles accounts payable may not be your best bet. You may get more leverage by talking directly to the person responsible for ordering your product or service. If that doesn’t produce results, then it’s time to talk directly with accounts payable.

<Insert date>
<Insert name>
<Insert address>
RE: OUTSTANDING ACCOUNT

<Insert name>

This is a reminder your account balance of $<insert amount> was overdue as of <insert date>. Enclosed is a statement of the account for your reference.

Please arrange payment of this account today, or if you cannot make full payment at this time, please contact us to make a payment
arrangement that is mutually acceptable.

Your prompt attention to this matter is greatly appreciated. We prefer not to turn this account over to a collection agency or a lawyer because such steps are likely to hurt your credit rating and result in additional costs for interest and collection fees.

If you have any questions regarding this account, please contact our office as soon as possible.

If you have recently made payment, please accept our thanks and ignore this reminder.

Regards,
<Insert name>
<Insert position>

3. Persistence pays off.

Once you’ve made your initial contact on an overdue account, it’s important to follow up regularly. Individuals and companies late paying their bills are likely to attach a higher priority to accounts with aggressive follow-up procedures. While it’s important to listen courteously to whatever explanations for being late are offered, it’s equally important to make it clear you need your money and you’re justified in demanding payment.

4. When it’s time to put it in writing.

If a late-paying customer fails to respond to your most direct and diplomatic collection efforts, it’s time to send a letter clearly stating your intentions if payment is not received promptly.

In addition to adding interest charges and turning the account over to a collection agency or a lawyer, you may want to mention such steps are likely to hurt the customer’s credit rating, something you would prefer not to do. (See the sample letter in the sidebar above.)

DACUM Codes
To help meet your professional needs, this article covers skills and competencies found in DACUM charts for drillers, pump installers, and geothermal contractors. DO refers to the drilling chart and GO represents the geothermal chart. The letter and number immediately following is the skill on the chart covered by the article. This article covers: DOK-1, 14; DOL-9; PIG-5, 9, 10; GOI-1, 14; GOJ-9. More information on DACUM and the charts are available here.

5. The final step.

By following the four procedures mentioned so far for collecting overdue accounts, you will minimize the likelihood of needing to take this final fifth step. Still, you will eventually find yourself dealing with a debtor who is clearly a deadbeat. Unfortunately, every business has to deal with some uncollectible debts.

While the easiest path may be to write off the debt as a loss, it may not be the wisest—at least not yet. You have earned that money; you have a right to it; and you need it.

If the amount of money is so small it’s not worth your time, it’s best to move on and write it off. However, if the amount is significant, you shouldn’t hesitate to put the matter into the hands of a collection agency or a lawyer.

Collection agencies are good at getting debtors to pony up. If you’ve never dealt with one, though, there are some things you should keep in mind.

Many collection agencies are aggressive and not known for their courtesy and tact. You should use them only for customers that you are willing to write off. Typically, they charge on a commission basis that will usually be around one-third of whatever they collect.

Overall, using a lawyer as a last resort for collection may be your best bet, but it is also likely to be the most expensive. Many lawyers will be willing to work on commission for collection efforts, but some may take on the job only on an hourly basis. It’s usually best to avoid that arrangement because it could prove to be too expensive to be worthwhile.

________________

Skillful handling of overdue accounts is not the most enjoyable part of running a business. But neglecting accounts receivable can cause hidden and often serious damage to your cash flow. Make sure you always do it right.

Learn More About Business Management
Find past WWJ articles that focus on business management here. Nearly 100 articles are available for viewing.

Bill Lynott is a management consultant, author, and lecturer who writes on business and financial topics for a number of publications. His book, Money: How to Make the Most of What You’ve Got, is available through any bookstore. You can reach him at wlynott@cs.com or through his website: www.blynott.com.