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 accelerate the collection of past due accounts receivable. These are:

1. Ask for the money

2. Set up 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 submitting monthly statements will not do the job. You must contact a customer if their account is past 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 for their clients, feel uncomfortable requesting a payment. You must overcome it or assign the responsibility to someone else in your company.

2. Set up a process and follow it

Collections are an important part of your financial operations and you need to set up systems and procedures as you would for any other administrative activity. Define what tasks are to be carried out, 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 communication program so you can start with a moderately aggressive program. “Days” refers to the days after the invoice is due, which may vary by customer.

• 3 days: Call the customer to inform them that the invoice is past due and ask when they can expect payment. This initial call can uncover problems that prevent payment. Don’t just leave a message, keep calling until you speak to someone with knowledge.

• 15 days: mail the first letter

• 25 days: second call

• 30 days: mail the second letter and put the customer on hold for credit

• 35 days: third call, made by the business owner or another senior employee

• 40 days: final letter demanding payment or the account will be delivered to collection

• 60 days – Hire a collection agency or third party attorney

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

• Thank you for doing business

• Your account is already expired

• Let us know if there are any problems or errors

• Otherwise, remit the amount owed

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 who pays in 60 days, adjust your terms to 60 net and follow the process defined above. Legitimate disputes or paperwork errors may make it appropriate to deviate from this program. There is scope for using good judgment when it comes to customer service.

If you don’t have the resources to make all your calls, prioritize. The initial call is important because it sends the message that you expect to be paid and can uncover valuable information. After that, focus your calling efforts on the largest dollar amounts and bills that are seriously 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’s also important to keep track of customer promises. You may come across a customer who is not acting in good faith – unable to connect by phone, fails to honor commitments, or files unwarranted and unreasonable disputes. You may want to speed up the collection process in these cases or send them directly to third-party collections. These clients will be difficult to collect, so it is a better use of your limited resources to focus on those accounts that can be collected and assign difficult cases to the professionals.

You will notice that legal actions are not mentioned above. Litigation should be the last resort in a collection scenario after both internal and external collection efforts have been exhausted. Even then, obtaining a judgment does not guarantee payment. If the client simply does not have the money, the cost and aggravation of the legal action are not justified. I know of some business owners who want to take a client to court and get a trial “in principle.” If you are willing to make the investment of time and money realizing that you may not get a tangible return, go for it. Otherwise, write it down to experiment and move on.

3. Put delinquent accounts on credit hold

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

4. Use third-party collectors before

The longer you wait, the more difficult 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 to 90% after one year. If you wait six months to a year before taking action, the debt is virtually impossible to collect. Best results are obtained by hiring external collectors when an invoice is approximately 90 days old, although this may vary by industry.

There are numerous professional collection resources available, including law firms and agencies. The typical collection fee arrangement is contingency-based, with your business paying a percentage of the amounts collected, but paying 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 flat rate offers available where you pay a flat amount for each account submitted for collection, but keep whatever is paid. Also, some attorneys bill for their services hourly, whether or not they charge for something.

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

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