Keep your accounts receivable healthy

Features - Business management

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

August 16, 2019

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The first, and perhaps most important, step in maintaining healthy accounts receivable is an unyielding policy against any delay in sending out invoices. Every day that you fail to process and mail an invoice is a day that someone else has the use of your money.

Whether you depend on your accountant or your software to monitor your accounts receivable (A/R), it’s important that the system’s aging report notify you of any accounts that are overdue by 30 days or more, depending on your credit policy, so that you can immediately place a call or send out a reminder. Most software packages can be programmed to produce aging reports automatically.

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

Of special importance is red flagging any accounts that are 60 days or more overdue. If that comes to 10 percent or more of your total A/R, you have a serious problem that demands immediate action.

To help avoid burdensome overdue accounts, make sure your credit policy is clearly defined with all new customers, and send it in writing. Explain when and how you invoice, and when you expect invoices to be settled. You may want 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 on your payment terms.

Whatever your decision, make sure that your employees and your 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 is enforced.

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

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 that you will ever be paid — the longer the delay, the greater the likelihood that 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 telephone call.

First, make certain that there is no complaint about your service or products. Then remind the customer that the account is overdue and ask politely if there is an explanation. Sometimes there may be a legitimate reason such as an overlooked or misrouted invoice. Be sure to evaluate your past-experience with the customer. It’s always possible that the company is experiencing unusual problems and deserves a little latitude.

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

Understand your customer’s internal procedures

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 accounts payable may not be your best bet. You may get more leverage by talking directly to the person responsible for ordering your service, especially if you explain that you’ll have to suspend deliveries unless the account is paid. If that doesn’t produce results, then it’s time to talk directly with accounts payable.

Persistence pays off

Once you’ve made your initial contact on an overdue account, it’s important to follow up regularly. Companies that are 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 that you need your money and that you are justified in demanding payment.

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 that such steps are likely to hurt the customer’s credit rating, something that you would prefer not to do. (See sample letter below.)

“While it’s important to listen courteously to whatever explanations for being late are offered, it’s equally important to make it clear that you need your money and that you are justified in demanding payment.”

The final step

By following the above procedures for collecting overdue accounts, you will minimize the likelihood of the need for taking that final step. Still, you may eventually find yourself dealing with a debtor who is clearly a deadbeat. 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 that it’s not worth your time, it will be best to move on and write it off as a bad debt. Every business has to deal with some uncollectible debts. However, if the amount is significant, you shouldn’t be hesitant to put the matter into the hands of a collection agency or a lawyer.

Collection agencies are very good at getting debtors to pony up, but if you’ve never dealt with one, there are some things you should keep in mind. Many are very aggressive and not known for their courtesy and tact, so 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 may not be the most enjoyable part of running your nursery, but neglecting accounts receivables can cause hidden and often serious damage to your cash flow.

William J. Lynott is a freelance writer in Pennsylvania, specializing in business management, as well as personal and business finance;