Accounts Receivables

Business cash flow and accounts receivable go hand in hand. Often cash is described as the oxygen for a business and A/R as the bloodline. Booking sales and revenue is great, but collecting them is even better. Not being able to turn your A/R into cash will or not doing it quickly will impact your business negatively. It will cause your growth to slow, drive up the cost of borrowing to meet the expenses of your company and consume the time of the business owner or managers. Collect on you’re A/R and you will positively impact your company’s bottom line.

There are ways to ensure that your accounts receivable are collectable and do not deteriorate. Through policies, credit application and collection efforts, you can give your A/R the structure required to avoid write-offs and bad debt costs.

Policies

Every business has policies governing practices in different areas of the company. Accounts Receivable is no different. There must be explicit ways in which credit (that is what A/R really is) should be extended to customers. Below are some of the “best practices” used in businesses to successfully manage the A/R.

Keep complete records of transactions – purchases, payments, dates, due dates etc. These should be automated if possible so they can be easily be tracked by due dates.
Have one employee primarily responsible for keeping the A/R updated and invoices going out regularly. While it is important for work to be reviewed, having one person responsible will bring accountability to the task. It will also ensure that it doesn’t fall to the bottom of the “to do” list because it not a task the employee enjoys.
Match the job of being in charge of A/R to the personality of your employee. Not everyone is suited to make phone calls inquiring or demanding payment. Give the task to someone who is capable of doing it effectively.
Each industry has its accepted practices and terms for A/R. Be sure you are using the most conservative practices. This would apply to payment terms, deposits, etc.
Use written contracts, service agreements and signed invoices whenever possible, so the customer knows exactly what is being delivered and what is expected from them. Make sure payment terms are clearly written on the contract.
If there is an upfront cost in obtaining materials, then an appropriate sized deposit should be required. For example: a landscaper may have to purchase the nursery plants in advance of doing a job. A dentist may have a lab (a third party) prepare an implant. In the event that the job was cancelled, the business has a sunk cost for that customer’s order that their business will need to recoup. Furthermore, if a customer receives the goods, but doesn’t pay, it is unlikely that shrubs or implants could be taken back or be useful inventory for another job. Therefore, if it is possible to collect a substantial deposit or ½ of the total amount due, then make it part of your policy. At the very least, enough money to cover expenses for a contracted job prior to the completion of that job should be collected.
Make payment due terms very clear. Some industries and businesses require that services be paid for when rendered. Others allow 30 days. Whatever terms you give, enforce. Anything beyond 30 days will add to the cost of doing business with that customer – since your bills are due in 30 days!
Consider adding to invoices or contracts language regarding interest due on accounts over 30 days. Often companies charge 10% on past due accounts and this deters late payments.
A policy should be in place to make sure new sales are not made to past due customers. This can be done by requiring payment in full on any past due amount, or putting a customer on notice that they are C.O.D. (Cash on Delivery) until their account is current. This way, if one of your customers is financially deteriorating you are protecting yourself by not having a much larger debt write off in the future. In addition, if the issue is sloppy accounts payable work on their end, being put on C.O.D will get their attention and often clear up such a problem.
When invoices are given or mailed, they should read “payable upon receipt”.
Use stamps in red ink on invoices to let customers when they are past due or that it is their final notice.
Avoid preparing and sending invoices just once a month or at month end. Invoices should be done immediately or as close to the day of performance. For instance: A job done on March 3^rd would not be invoiced until the end of the month in an office that billed only at month end. With 30 days to pay, that invoice would be due at the end of April will have been owed to the company for nearly 2 months by the time a “prompt” payment is made.

Before Extending Credit – Know Your Customer

When you allow your customer to receive services or products but do not require immediate payment, you are extending them credit. This is often the way business is done, but it is also where you have financial exposure to a customer. Ask yourself: “How well do I know this customer if I need to collect on this invoice?” If you don’t have necessary information on hand about a customer to effectively collect, then you have just identified your biggest risk. How much information you are able to collect will be dependent upon the amount of the transaction and the amount of pre-work or materials that will be purchased in advance. At the very least, it is helpful to have basic information in case of a delinquency problem. The questions listed below can be incorporated into a customer file or credit application unique to your company. It is also important to update this information periodically. The more information you can obtain, the better chances you will have at collecting if you need to file in small claims court.

Questions for Customer File or Credit Application

Individual’s Full Name: (This is necessary to track and serve a person)

Social Security Number: (In the event they’ve moved, this will help locate them)

Date of Birth: (assists in location process)

Address: (The last known address will be helpful in attempts to collect)

Is home rented or owned: (This will let you know if there is real estate that can be attached for payment should you obtain a judgment against them)

Employer: (This is where you would start to try to locate someone, as well as, garnish wages if you obtain a favorable judgment)

Employer’s address:

Name and phone of closest relative not residing with you: (Another person that would be able to assist in locating someone that has moved)

Bank account: (for garnishment purposes)

Signature for authorization to obtain a credit bureau report (This is the most definitive way to know what type of credit history a person has and if they have had bankruptcy or collection problems in the past)

When dealing with a business, you would want to get similar information such as:

Legal Entity Name

Location of Business and

Phone number

Location of Business Headquarters and

Phone number

Person contracting on behalf of business, the employee, manager, etc.

State of Incorporation

Tax ID number

Getting Your Accounts Receivable Up to Date

The best thing you can do in order to prevent losses in the future is to start fresh. Develop the policies you feel are applicable to your business practice and start them immediately. Have a meeting to let those that handle customers know how things will be changing and then inform them on the new policies. Since carrying out policies takes extra effort by the employees, you will want to make certain that they are incented to stick to your new program. In other words, make it clear that they must be followed.

As for the Accounts Receivable you already “own”, you should take the time and resources to see that they are scrubbed for problems and brought current.

Have an employee call all debt that is 30 days past due and ask for a date on which payment will be made. On that date, call again if payment is not received. When the account is 60 days past due, the business owner should place a call to the company and escalate the issue until a gain is made.
Let customers past due know that their account will be charged interest (this must be done 30 days prior to actually charging interest on the balance) and/or that they must pay Cash on Delivery for any future purchases. Or, give notice that the account must be brought current before any new purchases can be approved.
If your intention is to use a collection agency, turn accounts past 120 days over to the agency.
If you plan to use small claims court to obtain payment, go to www.smallclaim123.com and complete the questionnaire that will produce your legal documents and begin the process. Ideally, accounts should be legally pursued between 120 and 180 days.

Collection Efforts

This is an area where you will want to focus your energy on accounts over a certain dollar amount (known as your target). Initially, you may start with the largest dollar amount allowed under your state’s small claim court and work down. After you have your largest potential write offs under control, you may find that you drop your target dollar amount to a lower figure and work on that group of accounts. Over time, businesses are surprised just how low they are able to set their target. Businesses that used to go to legal measures on amounts over $1,000.00 find that when they efficiently collect and work down the number of past due accounts, they can begin collecting on anything over $100.00. This is due to the efficiency in their process and because the volume of past due accounts drops due to the instituted policies.

Options in collecting are:

Turning past dues over to collection agencies which charge either a portion of what is collected or a flat fee to collect.
Working with an attorney to collect or file in small claims court. They usually split the amount of money collected.
Sell A/R for a fraction of the stated value to a factoring business.
Pursue a small claims court case on you own, using www.smallclaim123.com where you keep whatever is awarded plus your filing fees.

Of all the above, filing in small claims court yourself is the least expensive way to get results and to collect the maximum of the past due invoice. Overall, any of the steps you take in suring up the company’s A/R, getting information when credit is extended, setting and enforcing policies will benefit your company’s bottom line. Avoiding write-offs is a sure way to increase profits!

LGB/2/05