Establishing an Effective Collections Strategy
In these tight economic times, you need to do everything you can to make sure your cash keeps flowing smoothly. Collecting accounts receivable promptly and efficiently is an important part of this strategy.
Collections are always crucial, but especially in today’s environment. Here’s why: During economic slowdowns, almost everyone is trying to hold on to their cash a little longer. This can create a snowball effect in which your customers are getting paid slower; so they in turn start paying you slower, potentially reducing your cash flow to a trickle.
Staying on top of collections requires a coordinated effort across multiple areas of your company, including accounting, management, and sales. The best course of action is to implement a comprehensive collections strategy before your receivables begin stretching out weeks -- or even months -- past the due dates.
The first step is to create an accounts receivable aging report. This report will help you track the payment status of all of your customers, both current and delinquent, by placing them in categories according to their payment status (usually 0 to 30 days, 30 to 60 days, 60 to 90 days, and past 90 days). The report should also include amounts due so you can identify which accounts are the highest collection priorities.
With this data in hand, you can easily see which accounts are current in their payments and which are past due -- and perhaps most important, how late past-due accounts are. This is critical, because the longer past-due accounts drag on, the lower your chances of eventually collecting. In fact, the odds of collecting payment in full drop from 94 percent after 30 days to just 72 percent after 90 days.
Clearly, there’s no time to waste. Be proactive by making phone calls to customers on the first day an account is past due. Some experts even recommend making courtesy calls a few days before the due date to ensure customers have all the payment information and paperwork they need and to confirm the payment will be made on time.
It’s not always smart to delegate this responsibility to a bookkeeper or accounting employee, as they might not have the best communication skills. Assign the task to a staff person with a strong but friendly telephone manner and explain to them the critical importance of the job. Depending on the volume of receivables, it might make sense for you to make the calls yourself.
Often, such proactive steps will nip the problem in the bud and customers will remit payment without further delay. However, your calls may uncover situations in which customers admit that they’re dealing with their own cash flow challenges and ask for some help. In these cases, you might consider offering a payment plan, since getting paid a little at a time is better than collecting nothing at all. If you do, put the plan in writing and structure it so the debt is fully repaid in no more than six months.
If you feel like you’re getting the brush-off from a customer, or if a promised payment doesn’t arrive promptly, it may be time for more drastic action in the form of past-due notices and dunning letters. No consensus exists among experts exactly when and how often such notices should be sent and how firmly they should be written, so use your best judgment.
The goal, of course, is to collect monies owed to your company. At the same time, however, you don’t want to alienate your best customers with threatening or derogatory language. Keep everything professional and courteous -- never get personal or emotional.
In today’s challenging economy, it’s understandable to sympathize with customers’ financial challenges and work with them the best you can. But don’t forget that past-due accounts receivable represent real money that belongs to you. You owe it to yourself, your employees, and your business to be diligent in your collections efforts to help ensure the ongoing success of your company.
Don Sadler is a freelance writer specializing in business and finance. Reach him at don@donsadlerwriter.com.
