How to Collect Accounts Receivable, Past Due Invoices, and Bad Debts
Where did all your money go? Sales are great. Margins are fine? Inventories are in line. Overhead is under control, but I can’t make payroll this Friday. What is going on!?!?
Have you checked your accounts receivable? You know that loan you are making to hundreds of your customers? Are they paying you back on time??
We are going to get into the details of how to manage your accounts receivable.
At the end, we are going to talk about how to deal with those maddening, past 90-day situations. They are so, so difficult and can really hurt your business. If you stay on top of your accounts receivable, it is possible that you’ll almost never have heart-stopping old debt.
It can threaten the very existence of your company.
Where does debt collection start? With great credit analysis and decision making. When do you do that analysis? In the beginning, and constantly. The financial condition of every company is always in flux. Therefore, you need to be sure you are vigilant about the realities on the ground.
For larger accounts receivable, you may want to check the following:
Dun & Bradstreet is the largest business credit reporting agency with over 70 million business credit listings.
Equifax Small Business Enterprise has credit evaluations for over 22 million small businesses and corporations
Experian SmartBusiness Reports provides access to credit reports on over 27 million U.S. businesses.
Individual reports from these agencies will run anywhere from $29 to $99 or you can reduce the cost through buying programs.
Some industries have credit reporting. Check with your association to see if that is one of the services they offer.
If the amount is large, you may want to see financial information such as income statements and balance sheets.
After you’ve completed your review and you are not comfortable providing the credit line desired by the account, you can potentially do so through having a personal guarantee from the owner or owners.
Now that you’ve established a credit line, it is critical that you enforce it. Additional analysis needs to take place for increases in the line. It not advisable to merely increase the line based on a good payment history with you over some period of time. While they are paying you on time, they might be paying others very poorly.
Finally, create a system in your organization for periodic reviews of all accounts above a certain dollar amount.
It begins with the credit check. Get credit information on everyone whom you sell on terms or even accept payment after delivery by COD check.
But you are not going to do the same credit check as everyone else. You are going to ask for five references, not three. Everyone has three customers that will say nice things about their creditworthiness. It’s harder to come up with five.
Your credit department is actually going to call all five. Many companies think it is good enough that they supplied names. Not you. You want to know not only their current payment pattern but also if there has ever been any difficulty getting paid.
Of course, you want their banking information and a person to speak with at the bank about their account to start collecting accounts receivable.
I pay my utility bills on time, so imagine my shock when the city sent me a late payment notice by email, text, and mail. I checked my auto payment system and the payment was made. I called, and they had received it. Two days late! Not my fault, but the fault of the bill pay system I was using. However, the lesson here is that they send out a late payment notice two days after the amount is due and not tender.
There is absolutely nothing wrong with automatically sending out reminders five days before due. There is nothing wrong with sending out a quick notice two days after like that utility company. In fact, there is everything right about it. Here is a maxim you should write on your bathroom mirror.
Every invoice that is paid on time will never be in the 90-day past due column.
The best collection effort is the earliest collection effort. And if you don’t get paid after that 2-day late notice goes out, your bookkeeping department should go into collection mode.
Of course, you don’t want to make your client mad. So, you should create scripts for each phone call. Five days: Hey Brian, Just calling to make sure you folks received invoice 4553. You always pay on time, so we figured we must have messed up getting the invoice to you. Do you need us to email over another copy?
At 15 days it is time to be blunt: Hey Brian, my bosses are asking for a definite date for payment. Are you able to do that? Also, can we discuss your current open account status? Is this a temporary problem or something long-term? We want you as a customer, but we don’t want to be stupid.
By 30 days past due, you should already be having this conversation: Hey Brian, We’ve had a couple of conversations about invoice 4553. Can I get a status on payment? I’m happy to take your debit or credit card over the phone, or you can email or text a copy of the check front and back.
At 45 days, I generally like to turn really soft. “Hey Brian, we’ve got that outstand item that is now 45 days past due. Is there anything I can do to help? I’ve been in cash flow hell a few times. How can we work together to get this resolved?
Of course, it is common for companies to send in a new order, even when they are running late on a payment. This gives an obvious reason to make a call. Hey Brian, we got a new order in today. If you can assure me that this is not going to be a problem in the future, I can keep you on an open account for the new order if I can get payment today.
If the customer makes it clear that there is a long-term problem and that there is a serious question about your getting paid anytime soon, you might try a few things:
Immediately offer a discount for payment today and switch to COD in advance
Offer to ship any open order COD in advance plus 20% of the old amount
Ask if the company will sign a UCC1 for the outstanding amount. This will put you first in line if there is a bankruptcy after a statutory period from signing the UCC1.
Offer to take back product as a credit against the outstanding amount.
Offer to take other assets as a credit.
Begin a lawsuit immediately. Collection agencies are not very useful at this point.
As the owner, how do you monitor collections. The best way is to receive a regular report giving you the average days to collect accounts receivable, past due invoices, and bad debts, the percent and dollar amount of accounts over 90 days, and the amount over 60 days.
You might also set up alarms. If total dollars over 90 days reach $XXX, then you need to be notified. If the average days to collect goes above 42 days (or some other number), you get a report. Some bookkeeping systems are set up to generate these reports automatically.
Almost every company takes their eye off the ball regarding credit and accounts receivable collections at some point. Most often this occurs when the economy is great and the average days to collect is at record lows. But recessions happen. Sometimes they are national. Sometimes they are regional. Sometimes they are just in your industry or your local town. When they happen, there can be a very rapid increase in your days to collect.
This calls for company-wide emergency response. Great companies have been brought to their knees when sales and collections dry up at the same time.
You need to be the fastest company to start collecting, so you are first to get paid. Every single day is critical in any type of economic slowdown.
The bottom line: If you are going to loan money to your clients through accounts receivable, or even if you are going to trust them to send you a check that you won’t clear until after the goods are in the customer’s hands, then you need to be as vigilant as a bank in making a decision to extend credit. Once you’ve extended credit, you need someone who has the task of collecting that money, and they need to have clear guidelines and authority to exercise that vigilance.
When To Send Invoices and Reminders?
Collecting Accounts Receivable Starts With The Credit Check
The bottom line:
If you are going to loan money to your clients through accounts receivable, or even if you are going to trust them to send you a check that you won’t clear until after the goods are in the customer’s hands, then you need to be as vigilant as a bank in making a decision to extend credit. Once you’ve extended credit, you need someone who has the task of collecting that money, and they need to have clear guidelines and authority to exercise that vigilance.
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