success-and-failureIn the real world, not every customer pays their invoices upon receipt or even when they are due.

How do you minimize the risk to your cash flow and even your business? Here are some ideas on how to reduce your exposure to long overdue accounts receivables.

1. Establish a credit policy for all accounts.

You may be happy extending a customer a credit line of $500 but would you be equally happy increasing your exposure to $10,000? Upon discussion with the customer establish a credit limit that works for both parties. Initially this limit will serve as the cap for any work or goods to be purchased. Once that limit is exceeded, then a payment will have to be made to bring the projected balance under your agreed upon limits. Communicating these limits up front, makes it easier to ask for a payment even though the account may be current. Establishing credit limits, minimizes your risk of granting credit.

2. Send out invoices as soon as the work has been performed.

Once the invoices have been sent, the clock starts ticking on the payment due date. When Companies send out invoices late, they are sending a message that they don’t need the money and the customer also can take their time in paying the invoice.

3. Invoice as per the client’s requirements.

Many companies have very strict requirements pertaining to how the invoice needs to be formatted and the kind of information required. Any deviation can cause your invoice to be kicked out of the payment queue and put aside for “special handling”. This is especially true when it comes to large corporations. It’s always imperative to confirm their payable requirements, so that your company can be paid smoothly. When setting up new customers ensure you ask about any requirements to avoid delays.

4. Have a system to organize your receivables.

Typically, good accounting software packages all have a A/R module that is easy to use and will track current and overdue accounts. At a minimum, your software should be able to produce a report breaking down all receivables into current, 1-30, 31-60, 61-90 and over 90 days overdue. Other features that are handy are:

  • sending out letters or emails at the click of a button to aged receivables
  • payment history by customer

These will all help in fine tuning credit limits as you go along.

5. Keep your customer information updated.

Far too many payments go uncollected because the invoices went to the wrong address or the business was sold and someone new is handling payables. These kinds of errors are easy to correct and should be part of any ongoing contact between your company and your customer.

6. Apply payments promptly.

Deposit checks daily and resolve any discrepancies between payment and what is owed immediately by picking up the phone. There is sometimes a tendency to deal with these discrepancies down the road and there are risks that the customer’s account will not be handled promptly and may in fact push him into an over the credit line or delinquent status when he really isn’t. You need to maintain the customers good will and come across as professional.

7. Apply payments correctly to the right account.

Payment application errors are one of the most prevalent errors. These can be solved, as mentioned above, by solving any discrepancies immediately. Payment application errors not only cause accounts to be misclassified as delinquent, but can also lead to a number of other problems, such as a customer being contacted for their presumed late payment, but as he has paid it on time resulting in a feeling of ill will between the customer and the supplier. Furthermore, a payment application error can also become a legal dispute when notification of an account being paid was sent to the wrong customer, and is subsequently used as proof of payment down the road.

8. Resolve disputes on a timely basis.

No company is infallible, and from time to time, there will be issues regarding the products and services sold. This will prevent the invoices from being paid. It is imperative to understand what the problem is and then try and rectify the situation as quickly as possible. Many times, companies will sit on customer disputes either due to a lack of manpower or a lack of urgency on the matter. The longer the dispute remains unresolved, the harder it will be to eventually collect the underlying invoice. As an important point in resolving a dispute, try to collect on any portion of an invoice that is not in dispute.

9. Regularly monitor and act upon all past due accounts.

As accounts become past due, whether it’s the accounting staff or having a full-time in-house collector, a qualified individual has to be designated to make that call and confirm with the customer as to when payment will be forthcoming.

10. Establish policies, letters etc for each stage of the collection process.

For example all accounts should get monthly statements, all accounts over 30 days should get a call, accounts over 60 days should get calls and a letter. Perhaps all accounts over 90 days should get a letter threatening collection action. You have to determine what works best for you and your business but policies have to be established and then the discipline to follow through has to be a priority. Your business success depends upon it.

11. Don’t Accept the Runaround.

It’s very easy in today’s business for people to avoid calls, emails and other means of communication. Don’t allow a company to give you the runaround. Be persistent, and even if you have to go all the way up to the owner/president of the company, reach the person with whom you need to discuss an outstanding payment.

12. Lock in a payment date.

This is so important for any successful collection. Promises to “pay soon” or “after I get a chance to speak with the boss” or “as soon as I get payment from my customer” are very vague reasons and leave the door open to being unpaid. Make sure you get a date for when payment will be sent, and if possible, get it in writing.

13. Place un-collectible accounts in collection.

Your credit policy should include a general guideline of steps to take, in the event that promises for payment continue to be broken or unreasonably drawn out. At some point, when the customer has demonstrated a complete lack of faith and good will, it’s best to place the account with a debt collection agency to continue with a more aggressive collection effort. It is better to place these sooner rather than later.

14. Review credit policies and each customer’s credit limit on a regular basis.

Reward the good payers that consistently pay on time and reduce the credit limit of those customers that are a pain. Remember the old 80-20 rule. 80% of your time on receivables is spent with 20% of your customers. Take a look at whether some of these customers are profitable or worth the constant hassle. Perhaps it is time to fire a customer or two?

Good luck!