11 Ways to Improve Accounts Receivable Collection

Many small businesses do a good job of delivering their goods and services, but then find it difficult to collect payment, often leading to a cash flow crisis. This may be because a customer’s creditworthiness was not properly investigated at the outset, or it may be because insufficient attention was paid to tracking and collecting overdue invoices. Either way, it behooves a business owner to set reasonable credit policies, use proven techniques to optimize cash flow, and enforce terms diplomatically but firmly because “the sale is not complete until the money is in the market.” bank”.

1. Optimize cash sales to avoid risk

There is no credit risk in cash. If your business allows cash and invoice payments, optimize the amount of cash, as a percentage of total sales, to the highest level possible for your industry or business sector.

2. Get deposits whenever possible

Larger sales orders, build-to-order, and in particular custom orders, may require a deposit of 10-50% of final purchase price at time of order. This will go a long way in alleviating cash flow shortages and also in ensuring customer commitment to the order. Deposits of this nature must not be refundable.

3. Suggest credit cards to secure payment

Make sure you have the ability to accept all major credit cards (Visa, MasterCard, America Express, and Discover). This is the best alternative to cash and reduces payment risk. In many cases, it also makes it easier for a customer to place an order. Customers opposed to paying in advance can rest assured by placing a “hold” on the amount of the sale against their card and processing payment only after the product is shipped or the service is completed. This guarantees your payment (for a period, usually 30 days) but does not appear as an advance payment to the customer. For credit card sales that are processed, the credit card processing company typically credits your business account within 1-3 days for a 2-3.5% service fee.

4. Require Progress Payments for Work Orders in Progress or Contract Sales

If you manufacture a product or perform work over a long period of time, say several months, include specific payment due dates in your sales contract (for example: 10% at time of order, 40% at 60 days, balance at completion). This will go a long way in avoiding cash shortages and will provide funds to continue the project. In many contract sales situations, the deposit amount is effectively the profit from the order and is obtained in advance; the balance or cost of the product is then transferred from the customer to the supplier under normal payment terms.

5. Develop and use a credit application form

Every business, large or small, that makes invoiced sales must have a credit application. This can be as simple as a one-page form, which can be faxed, providing critical information such as the name and phone number of the customer’s accounts payable contact, department head, and CEO. The form must also require a minimum of two business references and a bank reference. A key administrative person (in smaller businesses, usually the Office Manager) is delegated the responsibility of obtaining the information on the form, checking references, and suggesting a credit limit based on the findings.

6. Set a credit limit for each customer, big or small

After checking credit references, a credit limit must be established for each customer. For small customers, the credit limit should be set based on your demonstrated mid to high payment performance. For large companies, a credit limit should be set based on the amount of risk your company is willing to accept and is a direct reflection of the percentage of your business you are willing to dedicate to a customer. Normally, concentrating more than 10% of your business on a single client becomes a risk; 30-50% is very risky and more than 50% is potential disaster for your business. Bad things can happen to big companies too.

7. Monitor the age of accounts receivable by total and by customer

At least weekly, calculate the average age of your pending invoices per customer and total. Assign responsibility (for example, Office Manager) to generate and report this information. Develop a “Late” report showing each invoice 5 days or more past its terms. Set specific and reasonable goals based on your industry for “Average Days Receivable” and link a component of your Office Manager’s compensation package to achieve the goal.

8. Develop Standardized Procedures for Overdue Invoices

Develop a formal, written collections procedure that includes scripts or guidelines for contacting customers who have outstanding or overdue bills. The treatment adopted is always courteous but increasingly firm as the time of delay increases. The first call is usually just a courtesy consultation. At 60 days they may be reminded of the company’s terms and their credit is in jeopardy, at 90 days their account will return to COD, and at 100 days litigation may continue unless payment is received immediately. If the last stage is reached, you must be prepared to proceed promptly.

9. Avoid early claim letters and use the phone

Claim letters, overdue notices, and statements indicating a past due bill often do nothing more than irritate a responsible customer who may have a reasonable explanation for a slow payment. Instead, it is preferable to have your responsible accounts receivable person telephone the customer’s designated accounts payable (found on the credit application) to ask if the invoice has been lost or if there is some other problem. . Typically 80% of late payments are resolved this way and a relationship is created between key personnel from both companies.

10. Use discounted payment terms wisely, if at all

Offering an early payment discount does not always produce the desired results. If your customer’s problem is cash flow, they won’t be able to take advantage of the discount. Often customers who already pay on time will take advantage of the discount. You can correctly rationalize this as a reward for good customers, but as a result you have just reduced your overall profitability. Discounts that are attractive to customers often do not produce a favorable trade-off in time value of money for your company. It’s best to survey your slow-paying customers individually first, to determine what the potential value of the discount might be to your cash flow.

11. Use your accounting system to help manage credit and accounts receivable

Many small businesses use simplified accounting systems like QuickBooks or Peachtree and these systems are capable of reducing the amount of time required for managing accounts receivable. The customer can set credit limits and the system will provide a warning message when entering a new order in case that order exceeds the limit. Customer aging reports can be generated in a variety of formats. The data can be exported directly to an Excel spreadsheet and further analyzed if desired. Invoice data can also be exported directly to a customer via fax or email, saving considerable time. Current customer contacts and phone numbers are included in customer records and can be quickly extracted and used in screen reports to assist with collection calls. Be sure to use all the features of your accounting system to help in your efforts to manage credit and accounts receivable.