How to Collect Past-Due Accounts

Many small business owners have experienced the frustration of trying to collect past-due accounts. Because it’s such a difficult and time-consuming chore, owners sometimes put off collection efforts until receivables are 90 days or longer past due, or they just decide to write off old receivables as uncollected. Doing so, however, can put a serious dent in your company’s cash flow and profits.

Instead make a commitment to be diligent in your accounts receivable collection efforts. Start by establishing a credit policy that prevents you from extending credit to deadbeats in the first place. Even with such a policy in place, though, you may still encounter customers who are late payers. Here are the steps experts recommend you follow in order to collect past-due receivables:

1. Create an accounts receivable aging report. You need to know which accounts are past due and how late they are before you can take action. An aging report will track the payment status of all of your customers by time period (such as 0 to 30 days, 30 to 60 days, etc.) and the amounts due so you can easily spot potential problems.
2. Act quickly. Studies reveal that the likelihood of collecting receivables drops drastically as time goes on -- from more than 90 percent after 30 days to 74 percent after 90 days and just 50 percent after six months. If your terms are net-30 days and payment hasn’t arrived on day 31, you should be on the phone with your customer asking questions. Be friendly and nonthreatening, as most cases of slow payment can be resolved without conflict or accusations.
3. Consider working out a payment plan. If the customer confides that he or she is having cash flow problems, it may be wise to negotiate a payment plan for the amount past due. Keep it simple and straightforward. It should specify that consecutive payments of x amount will be made over x number of months, ideally with the debt fully paid off within six months. Put the agreement in writing and make sure both parties sign it. Also, future delivery of products or services should be strictly cash on delivery until the debt is repaid and you’re confident that the customer is once again financially capable.
4. Send past-due notices and letters. If courtesy calls and an offer of a payment plan don’t produce results, it’s time to get a little tougher. Your past-due notice and request for payment letter should explain the delinquent status of the account in firm but nonthreatening language. As in, “I’m following up on my phone messages in writing to make you aware of the past-due status of this invoice. Please remit payment at once, or contact me if you have any questions.”
5. Call in the cavalry. If you’ve still received no response after 90 or perhaps 120 days, send a final notice informing the customer that if payment is not received within x days (no more than 7), the account will be turned over to a collection agency. Then follow through on this action if you have to.

Hiring a collection agency is a serious step that should not be taken lightly, as it will probably threaten your future relationship with the customer. Weigh this carefully against the value of the outstanding receivable and the cost of writing it off, then make the decision that’s best for your company’s financial future.

Don Sadler is a freelance writer specializing in business and finance. Reach him at don@donsadlerwriter.com.