See Also:
Financial Ratios
Accounts Receivable Turnover
How to collect accounts receivable
What is Factoring Receivables?
Net 30 Credit TermsEvery company has them…past due and slow pay accounts. Here are some ways to help keep your cash coming in the door and collect accounts receivables.
Improve Accounts Receivable Collection and Invoicing¶
Commerical and industrial experience has proven the following percentages: Of ten new customers, six will pay on time, two will pay in 60 to 90 days and two will become collection problems.
Always watch your new sales. As money becomes tighter, you will receive one-time sales from firms that may be experiencing financial problems. These customers will bounce from business to business and need your close attention.
Be familiar with your customers’ credit. Only extend credit to organizations you feel confident will pay you. Make sure you don’t have to write off your hard earned sales through bad debt!
Pay close attention to the credit terms you are offering your customers. One good way to collect
accounts receivable (ar) is to do so before you deliver your product and structure your terms accordingly. An example of this would be a propane company in the winter months; nothing works better than to be paid prior to delivery.
Examples of
accounts receivable payment terms:
For custom manufacturing companies: 50% before work begins, 40% before delivery and 10% after delivery
For wholesalers and retailers:Depending on creditworthiness, 10 days net for companies with good credit, prior to delivery for companies with questionable credit or those that are past due.
Develop a minimum sales order that will require a credit check
Check three references on a new client
If payment history is greater than 60 days obtain supervisor approval
The following steps should be preformed in invoicing the customer:
- invoice within 24 to 48 hours after performing service
- review invoices for accuracy
- make sure that everything has been billed
- note payment terms on the invoice
Assign Responsibility for Accounts Receivable Collections
Use a dedicated collections individual. Designate one person in your organization to be the accounts receivable collections representative, someone who can make the collection calls and stay on top of
accounts receivable. There are some personality traits that you should look for when assigning this function. Some traits to look for: A professional presence, adept at working with and
handling difficult people, skilled at follow up and well organized in order to document collection efforts.
You may want to pay your accounts receivable collections individual a commission as an incentive to keep accounts receivable collections current. Alternatively, you might consider paying a bonus at certain increments based on established criteria.
The goal is to work with delinquent companies and receive payment as quickly and cost effectively as possible!
For many companies, accounts receivable collections may not be a full time commitment and may be added to a current employee’s responsibilities. If there is a legitimate reason the customer has not paid, it’s best to get this taken care of early so as not to impact your cash flow for any longer than necessary. Never underestimate the impact of reminder and
collection calls!
Accounts Receivable(AR) Collection Letters
Send reminder and collection letters. Letters combined with calls can help speed up your collections! Trigger points for letters may be as follows:
Balance at 30 days receives a reminder letter, balance at 60 days receives a harsh collection letter and credit hold, balance at 90 days receives attorney letter and balance at 110 days turned over to collections.
The number of collection letters in a series should be kept to a minimum. Experienced commercial credit grantors have found that there is a point of diminishing returns, generally reached after the first letter goes unanswered.
Examples of accounts receivable(ar) collection lettersRemind letter:
January X, 20XX
Dear Company A,
This is a friendly reminder that your account has a past due balance of $X.xx. Attached are the invoices we show to be unpaid; please check your records and if you find that these have already paid, please contact me at 713-555-5555.
If we do not hear from you or receive within 10 days from the date of this letter, your account will be put on credit hold and no further services will be provided until all overdue balances are paid in full.
Thank you for your prompt attention to this matter.
Sincerely,
Collections Representative
A reminder letter, signed by the ar collections representative, once a balance has reached 30 days old and a subsequent,
harsher collection letter when a balance reaches 60 days can produce desired results. Should the
harsh collection letter not produce results, an attorney letter may be in order as well as the services of a collection agency.
Following is an example of a
harsh collection letter which should be signed by the company’s controller.
February X, 20XX
Dear Company X:
We show your account has a past due balance of $X.xx. Previous attempts to collect the balance have failed and as a result, I have been forced to put your company on credit hold. Please call me immediately at 713-555-5556 to resolve the balance on your account and to avoid having this issue referred to a collection agency.
Sincerely,
Controller
Accounts Receivable (AR) Collection by Telephone
Given the use of voice mail the effectiveness of phone calls are somewhat diminished. However, they are still an effective means of collection. The phone calls enable the credit manager to present their case to the debtor for immediate response. During the conversation you can determine whether the claim will be paid in full and when. This is the time to determine the reasons for non-payment.
Three main reasons for non-payment
- Lack of funds. Most non-payments result from lack of funds.
- Dispute. Disputes can be discussed to determine whether or not they are valid. The valid claim must be adjusted quickly and fairly, the non-valid claim exposed and immediate payment requested.
- Refusal to pay. If it is refusal to pay, you must take third-party steps to enforce payment. Consider hiring a collections attorney.
Tips on phone collections
- Identify yourself and the company
- Call the person in charge
- Ask for the payment in full by a specific dat
e
- If the bill is in dispute, suggest a solution
- If a solution is met, put it in writing
- If a solution is not met, set up a personal meeting with the client
Managing the Accounts Receivable (AR) Process
To quote Peter Drucker: You can't manage it if you don't measure it! The same holds true for collecting accounts receivable! So how do you measure your effectiveness in collecting accounts receivable?
Daily Sales Outstanding (DSO)What is DSO? DSO is the average of your accounts receivable. The numerical accuracy of the number is not as important as the trend. It is intended to be a blended estimate of how long it takes to collect your accounts receivable. If you are making progress then it should be trending lower. The first thing you should do is calculate where you are today.
How do you calculate DSO?
DSO = 365/ (Annual Credit Sales/ Average Accounts Receivable)
Commercial Collection Servicies
Hire a collection agency. Ways to find a reputable collection agency include referrals from other companies as well as professional firms and organizations with which your company does business. No matter how you receive the referral, be sure to ask the collection agency for customer references and call the references. Some questions to ask: How responsive is the collection agency to your questions? Do they report progress on your accounts promptly and in a format that is user friendly? Do they remit proceeds quickly and accurately? Do they resolve issues quickly?
Final Comments
Review your internal processes. Collecting accounts receivable is an internal process as well! Before initiating collection calls, be sure your internal house is in order. It is vitally important that your cash applications are timely and done correctly. It’s extremely embarrassing and inefficient to have your collections representative make a collection call only to find that the customer has in fact paid the bill and the payment has been misapplied. A similar situation exists when a collection call is made and the payment was received 2 weeks earlier.
AR Collections should start with your cash applications function. Your process here is critical and must be followed without exception. Payments must be applied quickly and accurately. If a payment cannot be identified to an invoice, the customer MUST receive a timely phone call to identify what is being paid.
Make sure you issue invoices that make cash application quick and easy. Automation can be a big help when there are large volumes of invoices or you are short staffed. All systems should have an organized and mechanical follow up of accounts at regular intervals, for instance, 10,30 and 60 days past due.
Any program that permits three statements or a two to three month time lag before the first collection step is taken will result in a lower recovery ratio.
Make collections update meetings a priority for the controller and collections person. At the meeting, collection notes, progress and next steps should be reviewed.
Know the cost of past due accounts. If you cover your cash shortfalls with a line of credit, consider that at an interest rate of 10% on your line, every $100,000 in past due accounts costs you $833 per month or $10,000 per year.
Train your customers to be good payers. Creating an accounts receivable collection process and following it consistently will allow you to accomplish this important goal.