PrintThe prompt collection of accounts receivable is key no matter the economic environment, but it’s critical during tough times. Unfortunately for many small businesses, there is now a growing trend among large corporations: They’re taking longer and longer to pay their vendors. In some cases they pay up to four months after getting an invoice.
As these large customers stretch their payment terms, their vendors are seeing their cash flow cycles squeezed tighter. This makes it more important than ever for small business owners to ensure they collect receivables as efficiently as possible and keep cash flow running smoothly.
Efficient receivables collection requires a companywide effort, bringing together accounting, management, sales, and other critical departments. For best results, call together key representatives from each of these divisions to devise a comprehensive strategy before too many of your receivables are past due.
If you don’t have one already, your first step should be to create an accounts receivable aging report. This report tracks the payment status of each customer and the amount due. It sorts customers into categories according to payment status: 0 to 30 days, 30 to 60 days, 60 to 90 days, and past 90 days.
Looking at your report, you can see at a glance which customers are current and which are late and how late they are. The longer past-due accounts stretch out, the less chance there is that you’ll eventually collect them. Research shows that the odds of collecting payment in full drop from more than 90 percent after 30 days to just over 70 percent after 90 days and to around 50 percent after six months.
So you should be proactive. Contact customers (by phone or email) as soon as accounts are past due. Most slow-pay situations are resolved quickly and easily this way. Experts say it usually doesn’t hurt to make courtesy calls a few days before the due date to make sure customers have everything they need to process your invoice and confirm the payment will be made.
Sometimes your calls or emails will reveal that customers are dealing with their own financial problems. They may ask you for some flexibility in making the payment, in which case you might offer to work with them on a payment plan. If so, be sure to put everything in writing and insist that the debt be paid in full in six months or less. And don’t accept a check stamped “payment in full” if it doesn’t cover the full payment, as this will pretty much legally absolve the customer from any further obligation.
On the other hand, you may end up getting the runaround from customers trying to avoid you or making excuses. In this case you should consider the next step: sending a past-due notice and/or collection letter. Use your best judgment with regard to when and how often to send these notices and how firm you should be. Always keep your communications professional and courteous -- never let things get personal.
While it may be smart to work with good customers in payment of their debt, remember that past-due receivables are, in effect, interest-free loans from your business. It’s your money and your responsibility -- to yourself, your company, and all your stakeholders -- to do all you can to collect the money owed to your business.
