Putting in place a service charge, or a fee for late payment, sometimes comes across as a negative act in the accounts receivable department. Most customers are not happy to hear that your company uses late fees and most of your employees probably don’t enjoy having this conversation with customers either. However, enforcing late fees can do wonders for your accounts receivable and business.
The trick is that you enforce these late fees or service charges in the right way. Since customers are usually turned off by the thought of these, you need to be careful about how you present them, as well as when you present them. Below we’ve included the four steps you need to take before introducing late fees in your accounts receivable department.
SET CLEAR EXPECTATIONS
It’s always a best practice to be up front and clear with your customers. If you choose to enforce a late fee, make sure this is included in your initial contract with your customers. Let them know that you will be enforcing a late fee so they understand what to expect. If your customers are unaware of the threat of a late fee, what’s the point of having one?
Not only should you verbalize this with your customers but include this on your invoice as well. A simple line included on your invoice stating that invoices not paid within the payment terms will be subject to a X% monthly late fee. This can be as little as 1.5 or 2 percent, based on average percentages.
GET EVERYONE ON BOARD
It’s important to make sure everyone is on board and stands behind your late fees, and this includes people beyond the accounts receivable department. Everyone from the owner of the company to your sales representatives and customer service agents should understand why you’re choosing to enforce late fees. If not, you might find that you’re getting undermined by others who interact with and have relationships with the customer.
EDUCATE YOUR CUSTOMERS
Most customers might just see your late fees as an inconvenience to them, which is why you need to educate your customers on your late fees. Help them to understand why you have them in place, and also coach them as to how they can avoid incurring them. By helping a customer to understand the late fees, they are more likely not only to pay on time but to do so less begrudgingly.
One of the main hurdles to implementing a late fee plan in the accounts receivable department is accounting for it in your ERP system. Many times ERP systems actually make this harder by forcing you to track down the invoices that have a late fee, manually calculating the new cost with the late fee and writing off unpaid late fees. However, you can eliminate these issues that might be holding you back by implementing an accounts receivable software. These can usually handle the additional late fee fields added to an invoice, eliminating any of the manual activities your ERP would force you to do.