Managing accounts receivable collections can be an overwhelming task, so it’s easy to fall into bad habits for the sake of crossing something of the to-do list. But bad habits can lead to costly mistakes and if you’re regularly falling victim to one or more of the following, you may be doing more harm than you realize. These mistakes can lead to your company increasing their past due accounts receivable and their amount of bad debt. Below learn some of the most common receivable collections mistakes and what you can do to make sure they are not happening in your organization.
MISTAKE #1: NOT DOING YOUR HOMEWORK
Many companies stack up bad debt because they take on customers with little or no assurance that they will be able to pay their bills. Extending credit to every customer who asks for it is not good practice, and you must put policies and procedures into place to ensure you’re only offering credit to those customers who can and will pay you on time.
HOW TO AVOID IT
Ask any customer (new or returning) to fill out a credit application. This provides you with all of the information you need as well as references as you decide if you should extend credit and the amount.
Review your current credit sales and credit collection policies. Do you have a manual written up for your employees to ensure everyone is on the same page? This is a crucial document for any company offering credit terms to their customers.
MISTAKE #2: LETTING SMALL PROBLEMS TURN INTO BIG ONES
If you extend 30 day terms to a customer and still have not received payment on by the end of that 30 days, don’t wait another minute, contact your customer immediately. The fact that the invoice has gone unpaid this long is an early warning sign of a potential collection problem and that 30 days can quickly turn into 90 days, 120 days, and beyond. If you’re not staying in contact with your customers, reminding them of upcoming due dates, and making an effort to collect on time, they may pick up that vibe and pay their other more demanding creditors before you.
HOW TO AVOID IT
Make sure customers know they are being monitored and that you know when they are late on a payment by sending reminder letters and statements regularly. Sending out letters, emails, and scheduling phone calls can be time consuming, which is why we recommend developing templates and call scripts to help you quickly create and send these communications. You can even take it a step further by automating this entire process with accounts receivable management software; ensuring you don’t miss a beat.
MISTAKE #3: GETTING TOO WRAPPED UP IN OTHER WORK TO WORRY ABOUT OUTSTANDING INVOICES
Whether you have a part time A/R clerk, a full time A/R staff, or an office manager who handles accounts receivable collections, there is an overwhelming amount of work that must be done just to collect one single invoice; especially when you rely on manual processes and spreadsheets to manage your invoices. With so much to do and only 8 hours in the work day, it’s easy to let important tasks slip down the to-do list such as sending payment reminders, calling customers, and following up to confirm invoice receipt. Alright, so having too much to do is not necessarily a mistake, but letting it continue is.
HOW TO AVOID IT
One thing to consider is the size of your A/R staff; do you have too few people dedicated to collecting invoices, too many, or just the right number? Read our whitepaper to find out.
We have found in our experience that hiring more employees is not always the answer to your accounts receivable problem; it’s usually the process and tools being used which is slowing you down. By utilizing accounts receivable management software, you can triple your efficiency without hiring additional employees and focus on resolving disputes and making phone calls, not typing emails, digging up account information, updating spreadsheets, and putting out fires.
MISTAKE #4: IGNORING A/R REPORTS UNTIL THE YEAR-END PUSH
Keeping tabs on your cash flow, forecasts, and important accounts receivable collections metrics is key to making sure you are meeting your financial obligations and collecting the money that is owed to you; but most companies ignore A/R reports until they start to see a difference in cash flow or feel the pressure of year-end. Generally this is the case because companies are using the wrong tools to try and pull this information together, such as ERP, CRM, and Excel. The problem is that these systems were not designed for the task at hand, making A/R reporting complicated and time consuming. Additionally these reports are never real time because by the time they are finally complete, things have already changed in the department.
HOW TO AVOID IT
Monitoring, measuring, and improving receivables performance is a proven way for companies to increase cash flow, but many don’t make this a priority. Why? Because with manual processes like spreadsheets as the foundation of their strategy, gathering and analyzing information is extremely time consuming. This is where a dashboard for receivables management can become a real game changer.
With a dashboard for receivables management you can quickly translate your objectives into measurable metrics and see where you are today vs. your organizational goals. A dashboard gives collectors, managers, and executive’s instant access to both basic and advanced data elements to help them better understand the current state of their receivables and progress toward personal and organization goals. The dashboard is easy to read and easy to understand with visual data providing insight into critical data such as:
- Average days to pay
- Current days sales outstanding and a view of the 6 month DSO trend
- A cash summary
- Top delinquent accounts
- Summary of collection activities
- Percent of overdue receivables
- Average time to receive payment per invoice
- Accounts receivable turnover ratio
- Average days receivable
- Current A/R aging by invoice date
- And more
MISTAKE #5: TREATING ACCOUNTS RECEIVABLE MANAGEMENT AS AN ACCOUNTING FUNCTION
How does your company view accounts receivable today? It is important for your entire team to view look at A/R not as just an accounting function but as a strategic area of your business plan. It should be treated as a customer service function because each interaction you have with a customer will play into the way they feel about your company; it serves as a repeat sales driver since customers will not do business with you again if the payment process is stressful; and it is a revenue driver since an invoice is only an invoice until you turn it into cash by collecting it.
HOW TO AVOID IT
There are a number of things you can do to help make the payment process painless for you and your customers, boost repeat sales, and get paid faster. Check out this white paper to pick up a few simple and effective best practices.