4 Critical Best Practices for AR Collections

Cash flow is the lifeblood of every business and slow paying customers can seriously affect it. There are four fundamental best practices that every business should implement to expedite the collection of overdue accounts receivable. These are:

1. Ask for the money
2. Establish a process and follow it
3. Put delinquent accounts on credit hold
4. Use third-party collectors before

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 monthly statements won’t get the job done. You must contact a customer if their account is not due and request payment. At some point, this simple request can act as a reminder and get the bill paid. Many business owners, particularly those who provide professional services to their clients, are uncomfortable requesting payment. You need to get over it or assign the responsibility to someone else in your company.

2. Establish a process and follow it

Collections is an important part of your financial operations, and you need to set up systems and procedures just like you would for any other administrative activity. Define what tasks are to be performed, when they occur, and who is responsible. A credit and collections management system can be helpful in helping you define your process and communication templates. Below is a sample communications schedule for a moderately aggressive program to get you started. “Days” means the days after the invoice due date, which may vary by customer.

• 3 days: Call the customer to let them know the bill is past due and ask when you can expect payment. This initial call may uncover issues that prevent payment. Don’t just leave a message, keep calling until you speak to someone knowledgeable.

• 15 days: send the first letter by email
• 25 days: second call
• 30 days: send the second letter and put the client on credit hold
• 35 days: third call, made by the business owner or another senior employee
• 40 days: last letter demanding payment or account will be turned over to collections
• 60 days: Hire a third-party collection agency or attorney

Create standard collection letters and call scripts to support this program. The message should be short and to the point:

• Thank you for doing business
• Your account is now past due
• Let us know if there is a problem or error
• Otherwise, send the amount due

Follow the same process for all accounts; don’t make exceptions for “good customers.” However, it may be necessary to adjust the time to reflect exceptions. For example, your standard terms might be 30 net, but if you have a large customer that pays in 60 days, adjust your terms to 60 net and follow the process outlined above. Legitimate disputes or paperwork errors may make it appropriate to deviate from this schedule. There is room to use good judgment when it comes to customer service.

If you don’t have the resources to make each call, prioritize. The initial call is important because it sends the message that you expect to get paid and may uncover valuable information. After that, focus your calling efforts on the largest dollar amounts and bills that are long overdue. The AR aging reports available in most accounting software packages do not support this approach, but there are collections management software products designed specifically for this purpose that are useful if you have a large volume of invoices or accounts to collect.

It is also important to follow up on customer promises. You may come across a customer who is not acting in good faith: unable to connect by phone, failing to honor commitments, or making unreasonable and unwarranted disputes. You may want to speed up the collection process in these cases or send them directly to third-party collections. It will be difficult to collect from these clients, so it is a better use of your limited resources to focus on those accounts that are collectible and assign the difficult cases to professionals.

You will notice that legal action is not mentioned above. Litigation should be the last resort in a collection scenario after internal and external collection efforts have been exhausted. Even then, getting a judgment does not guarantee payment. If the client simply does not have the money, then the cost and aggravation of legal action is not justified. I know of some business owners who want to take a client to court and get a judgment “in principle.” If he’s willing to invest time and money realizing he may not get a tangible return, go for it. Otherwise, point it to the experience and move on.

3. Put delinquent accounts on credit hold

Denial of desired products or services is your leverage with a delinquent customer. If you provide something your customer needs, hold the additional delivery until you pay or make acceptable payment arrangements. You may also consider making future COD shipments or requesting cash in advance while paying off a past due balance.

4. Use third-party collectors before

The longer you wait, the harder it will be to collect. Research has shown that 26% of invoices that are three months old are not recoverable. This increases to 70% at six months and 90% after one year. If you wait six months to a year before taking action, the debt is virtually impossible to collect. The best results are obtained by contracting outside collectors when an invoice is approximately 90 days old, although this may vary by industry.

There are numerous professional collection resources available, including agencies and law firms. The typical collection fee arrangement is based on contingencies, in which your company pays a percentage of the amounts collected, but pays nothing if collection efforts are unsuccessful. The percentage of the fee can range from 10% to 50% (or more) depending on various factors. However, there are fixed fee offers available where you pay a fixed amount for each account sent for collection, but keep everything that is paid. Also, some attorneys charge for their services by the hour, whether or not you charge anything.

One final thought: make sure you know who you’re dealing with. There are dishonest agencies that use excessive and illegal tactics. Involving one of these could damage your reputation and relationship with customers. As with any other professional service provider, you should check references and work with a local agency or local representative of a national company whenever possible. Avoid agencies that use high-pressure telemarketing for their collection services.