Cash flow is the lifeblood of every business and slow paying customers can seriously affect it. There are four Accounts Receivable Follow-Up Procedures that every business should implement to expedite collections of past due accounts receivable:
- Ask for the money
- Set up a process and follow it
- Put delinquent accounts on credit hold
- Use third party collectors sooner
1. Ask for the money
You provided a product or service and your customer is obligated to pay for it. Waiting patiently or passively mailing out monthly statements won’t get the job done. You need to contact a customer if their account is past due and ask for payment. Sometime this simple request can act as a reminder and get the bill paid. Many business owners, particularly those that perform professional services for their clients, are uncomfortable asking for payment. You need to get over it or assign the responsibility to someone else in your company.
2. Set up a process – and follow it
Collections are an important part of your financial operations and you need to set up collection procedures and systems for accounts receivable like you would for any other back office activity. Define what tasks are to be performed, when they occur and who is responsible. A credit and collections management system like Lockstep Collect (www.lockstep.io) may be useful to help you define your process and communications templates. Below is a sample communications schedule for a moderately aggressive program to get you started. “Days” refers to days after invoice due date, which could vary by customer.
- 3 days: Call the customer to inform them that the invoice is past due and ask when you can expect payment. This initial call may uncover issues that are preventing payment. Don’t just leave a message — keep calling back until you speak with someone knowledgeable.
- 15 days: mail first letter
- 25 days: second call
- 30 days: mail second letter and put customer on credit hold
- 35 days: third call, made by business owner or other senior employee
- 40 days: final letter demanding payment or account will be turned over to collections
- 60 days: engage third party collections agency or attorney
Create standard collection letters and call scripts to support this program. The message should be brief and to the point:
- Thank you for your business
- Your account is now past due
- Let us know if there is a problem or error
- Otherwise, please remit the amount due
If do not have resources to make every call, prioritize. The initial call is important because it sends the message that you expect to be paid and can uncover valuable information. After that, focus your calling efforts on the largest dollar amounts and invoices that are seriously past due. The AR aging reports available in most accounting software packages do not readily support this approach but there are collection management software products specifically designed for this purpose which are useful if you have a large volume of invoices or accounts to collect.
3. Put delinquent accounts on credit hold
Denial of desired products or services is your leverage with a delinquent customer. If you provide something that your customer needs, withhold further delivery until they pay or make acceptable payment arrangements. You can also consider making future shipments COD or require cash in advance while a past due balance is being paid down.
4. Use third party collectors sooner
The longer you wait the harder it is to collect. Research has shown that 26% of invoices three months old are not recoverable. This increases to 70% at six months and 90% after a year. If you wait six months to a year before taking action the debt is virtually impossible to collect. Best results are obtained if third-party collectors are engaged when an invoice is approximately 90 days old, although this can vary by industry.
There are numerous professional collection resources available including agencies and law firms. The typical collection fee agreement is contingency-based with your company paying a percentage of any amounts collected but paying nothing if the collection efforts are not successful. The fee percentage can range from 10% to 50% (or more) depending on several factors. However, there are fixed-fee offerings available where you pay a set amount for every account submitted for collection but keep everything that is paid. Also, some attorneys bill for their services on an hourly basis, whether or not anything is ever collected.
