Many companies have a “U-shaped” accounts receivable report, with higher numbers of receivables in the 1-30 days and over 120 days categories, as seen in the figure below:
The goal, however, should be to obtain a flat line of receivables evenly disbursed over each time period, with the over 120 day category representing the smallest amount of receivables and with the least amount outstanding as possible.
All companies should have formal procedures in place to enforce the timely collection of accounts receivable. These procedures should be reviewed by an attorney who is familiar with the industry to verify the procedures are legal and binding. For instance, some industries such as construction have specific requirements for what needs to be completed to enforce a lien or a collection.
Here are a few ideas to keep your company’s accounts receivable to a minimum:
1. Do your homework before accepting a new customer. Before your company agrees to do business with a new customer, make sure you have addressed the following:
- Has a credit check been completed?
- Have credit limits been set?
- Does the customer require purchase orders?
- Have retainers/customer deposits been considered, especially if the customer is ordering special products that cannot be easily resold or returned to the supplier?
- Do you understand the customer’s pay cycle and is it noted in the customer file?
- When do they process checks?
- By what date do they need the invoice in order to process the check in the next check run?
- Can they pay you through ACH?
- If you have a contract, are the payment terms clearly defined?
- If you do not have a contract, with whom did you discuss the payment terms?
- Do you have the appropriate contact name, phone number, and e-mail address if you do not receive payment in a timely manner?
- Can you bill electronically, which saves postage, ink, paper, and time?
- If this will be a recurring bill, can you arrange a corresponding recurring electronic transfer for payment?
2. Ensure your billing processes and product/service delivery are complete and accurate.
- If you received a purchase order, does it match the invoice?
- Did you deliver the product or service on time and/or as agreed? If there is a problem, fix it and then correct the system so it does not happen again.
- Did you obtain customer sign off that all items were completed to the customer’s satisfaction?
- Did you obtain approval for any “extras” or out of scope work? Consider billing “extras” or out of scope work on a separate invoice so the items that are already approved are paid in a timely manner.
- Bill timely so you are paid timely.
3. Assuming your payment terms are net 30 days, what should you do at 30 days if you have not been paid?
- Email a friendly reminder to the customer and notify the salesperson that payment is late.
- At 40 days, call the customer to determine the reason for late payment. If there is a problem with delivery or the product, resolve the issue as soon as possible.
- At 50 days, send a second, more strongly worded collection letter.
- At 60 days, call again to determine the status of payment and ask your salesperson to call their contact. Consider putting future orders on hold. If this is a persistent problem with the customer, consider changing payment terms to C.O.D.
- At 70 days, send a final letter and notify the customer that they will be turned over to collection if payment is not received within 10 days.
- At 80 days, engage a third party to send a collection letter.
- At 90 days, the third party should call the customer.
- At 100 days, the third party should send a second letter.
- At 120 days, turn the matter over to collections.
Remember, when it comes to accounts receivable, your company does not earn any profits until you collect the cash from your customers