A Step-by-Step Guide to Accounts Receivable Collections
Collecting on accounts receivable can keep your business afloat. It improves cash flow and prevents the number of non-payers from getting out of control.
How you react to incidents of nonpayment determines whether you lose the entire invoice or have it collected. Sending your debt to an accounts receivable collections agency increases the chances of getting the money owed to you.
Let’s take a look at managing your accounts receivable and how the accounts receivable collection process works.
The Importance of Managing Your Accounts Receivable
Managing your accounts receivable allows you to spot customers’ warning signs who are unlikely to pay their bills. Noticing red flags early can prevent a painful collection of accounts receivables later.
There are several options you can implement to reduce the chances of non-payment, including:
- Offering an early payment discount.
- Incorporating payment plans into your business.
- Getting the client’s signature before products/services are provided.
The organization is the key to managing your accounts receivable.
Share all information with multiple departments and invest in a dashboard that keeps documents organized and provides automatic notifications on customers, their payment history, and how old debts are.
Accounts Receivable Collection Process: A Step-by-Step Guide
But what if you do need to employ an accounts receivable collector to recover an unpaid invoice?
Intelligent businesses already have an accounts receivable collections policy in place, so they know exactly what to do if a client fails to pay on time.
Step One – Resend the Invoice
The first step is to resend your invoice. Many invoices are forgotten or never make it into the client’s inbox to begin with. Mistakes happen, emails end up in spam folders, and not every incidence of non-payment is an active attempt to cheat your business.
Step Two – Contact the Client by Phone
Emails are easy to dismiss. Calling the client directly can quickly get matters straightened out. Don’t be afraid to call more than once if you’re concerned that the client needs some extra encouragement.
At this point, avoid threatening legal action. Maintain a tone of positivity and encouragement. During the first 30 days, it’s best to discuss the client’s situation and offer a payment plan.
Step Three – Send a Formal Letter
After a month or so has elapsed, it’s time to escalate the collection process. Sending accounts receivable collection letters drawn up by an attorney delivers a strong message.
This is a more formal step to take and should detail the penalties of further non-payment. You may want to escalate your accounts receivable collection procedures early if the client is non-cooperative. Many clients fear legal action and usually pay up if you’ve taken this step.
When to Hire a Collections Agency
What happens if the steps in your accounts receivable collection process flow chart fail and the client either doesn’t respond or continues to provide excuse after excuse?
The next step is to hire a collections agency. AR collections can take two forms. You can either sell the debt to the agency at pennies on the dollar or simply hand the account over to them, and they take a percentage.
Collection agents will often escalate to court action by their accounts receivable collections policy. It depends on various factors, including the cooperation of the debtor and the size and age of the debt.
As a general rule, it’s considered appropriate to escalate to accounts receivable collections action after 90 days of non-payment.
Handing your account to a debt collector too early risks negative reviews when the client may simply have temporary cash flow issues.
Tips for Collecting on Accounts Receivable
There are actions you can take to make a successful accounts receivables collection. Altering your business policies and taking a proactive approach can significantly impact the likelihood of employing a professional collections agency.
These are some of the steps you can take:
Offer Payment Plans – Many clients may be embarrassed to ask for a payment plan. Incorporating payment plans into your products and services can avert these issues early. A lot of non-payers are not malicious; they simply lack cash flow.
Early Payment Incentives – Getting paid in full before delivery is the easiest way of avoiding non-payers. Offering a 10% discount for early payment is a real selling point for your business.
Automate Your Process – It’s not uncommon for lousy management to play a part in bad debts. Automating your accounts receivable collections encourages faster client payment and reduces payment processing costs.
Create an AR Aging Report – Stay on top of accounts receivable by creating an aging report. These reports detail unpaid invoices and how long invoices have been outstanding. This can help you focus your attention on the right places and provide critical financial insights into your company, such as calculating your receivables turnover ratio.
Do you have outstanding accounts receivables to collect? Then contact the Collections Bureau of America for more information on what your following best options are.
Our debt collection agency operates in all 50 states and has more than a half-century of experience in collecting personal and commercial debts. Get in touch and let us take the responsibility of collecting what you’re owed.