Ensure Timely Payments with a Well-Structured A/R Collections Process.

A repeatable collection process is as essential as the actual sale for the profitability of your company.  Slow-paying customers create significant cash flow problems that cost your company time and money to make the collection and any interest expense on borrowed working capital to carry you through their slow-paying.  Below are four guiding principles used to set up an effective A/R collections process:

1. Establish clear payment terms. Before any order is accepted, you must determine whether you will extend credit terms for that customer order or insist upon payment on completion.  Since payment terms can vary, they should be agreed to upfront and reinforced on your invoice and statement.
2. Timely billing to the customer. Failure to invoice when agreed to sets the precedent that it’s OK to pay late because you are slow in processing your invoice.  Getting paid on time starts with immediate invoicing upon completion.
3. Weekly review of your A/R aging report. Prompt collection of money due will never happen if you don’t know who is late, who is about to become past due, and what you will do by past-due accounts.
4. Consistently follow your A/R collections process to collect the monies owed to you when they are owed. Regardless of why customers fail to pay you on time, the purpose of every contact with the customer is to collect money that is due.

Regardless of the projected profitability of a sale, fail to collect the cash from that sale, you lose.  You lose not only the cost of labor, material, and delivery.  You lose the opportunity to apply the cash you should have collected to pay those you owe money.  Do this, and you will earn less money.

Below are ten A/R collection concepts that, if done respectfully and consistently, each follow-up you make with your customer to pay you will advance your relationship with them through your professionalism in doing what you say you are going to do.

1. Value the phone call more than email or mail when initiating your A/R collections process.

Why use the telephone?  There may be valid reasons why your customer has not paid a bill, and past due or “dunning letters” will not reveal this.  Telephone calls give a more personal touch while reinforcing the importance of your collecting what you are owed.

Telephone contact is faster, more productive, and brings you into direct contact, should there be a problem.  By asking the right questions over the phone, the collector will determine the problem while being able to set up a quick resolution.

The first call is the pre-due date call.   The next call is to be made the day after the account goes past terms.  I.e., the 31^st day if the customer is on 30-day terms.  Follow-up calls are made the day after a promised payment date until payment is received.

It is easy to get sidetracked in a telephone conversation unless you follow a guide.  During your calls, be comfortable with the pause after your question to avoid rushing your phone call.  Even if the pause lasts 30 seconds, wait for a reply.  Waiting for the response vs. moving on before an answer is given is how you get all the facts, overcome any objections, and get a commitment for payment.

Use fax numbers and email addresses for customer contact follow-up based on what was agreed to through your phone call.  This is the most efficient way to reaffirm the urgency you approach in your business since you don’t consider any work as complete until you get paid what you are owed.

2. Record each collection activity to confirm where you are by each past-due account in your collection activities.

Failure to document your collection activities increases your risk of alienating your customers in your different attempts to collect the money owed to you.  No one wants to be hounded for money they owe you.  Avoid sounding like a broken record by recording pertinent data unique to each collection activity, particularly related to commitments made.

The documentation you keep can be electronic or hard copy. The purpose of keeping track is to create a tracking system (“tickler”) to remind you which customers are due for follow-up each day while also providing you with notes of the conversation history.  The documentation you keep also serves as evidence should you have to go to court to collect.  These documents are to be kept in a location accessible by all involved personnel in your A/R collections process.  Fail to document the actions you fail to position yourself and each person involved in collections with knowledge of promises that have been made that their subsequent follow-up is addressing.

At times, it may be advisable to confirm verbal telephone commitment payments made by the customer in writing as follows:

Dear Mr./Mrs. ________, Confirming our conversation of today, ________ (date), you promised to pay our invoice of _______ (date) in the amount of $________ on ________ (date).

We do appreciate your business and thank you for honoring us with your payment.

3. Your A/R collection process begins at order acceptance.

Every effective collection procedure begins well before the bill is due and payable.  Confirming upfront how to follow up on expected payments before any agreement to proceed is signed is another key to collecting the money you are owed.  Knowing who you are to follow up with and how to contact them reduces likely problems before the payment due day, enhancing your ability to be paid on time.

Before processing any order for a new customer, be sure that you input the customer and credit information at the time of order acceptance.  At a minimum, you need the customer name, address, telephone number, and extended terms.  If you accept credit cards, this should also include verifying the ability to charge and who is authorized.

If an existing customer, before accepting a new order, confirm if their A/R status is current.  I.e., less than 30 days past due.  If the account has a balance that is more than 31 days past due, that balance is to be requested to be paid when the order is placed or at the time of delivery if you have a positive payment history with this customer.

4. You reinforce your payment expectations at the time of the invoice.

Prompt invoicing is the next essential element.  All bills should be sent out within two days of work completion or delivery.  When appropriate, the invoice should be left with the customer at the time of service or product delivery.

If the invoice must be sent, make sure that it is sent to the attention of the appropriate person identified at order acceptance.  Included on your invoice are the terms you have extended your customer in addition to the invoiced charges you are seeking payment for.

If you intend to charge interest for late payments, this is when that intention is formally communicated.  By law, you must state on the invoice that you will be charging interest when you bill your customer.  Also, remember that if you collect interest payments, interest income will be reported on your 1120 (Tax).

Another valuable practice to ensure timely invoice payments is having a company representative call or e-mail the customer within two days of invoice submission to confirm that the work has been completed satisfactorily.  These calls MUST be perceived as a “Customer Service Call,” not a call to see when your bill will be paid.

Your primary goal for this call is to ensure that everything is satisfactory with the project, product, and service you delivered.  If the answer is no, the person making the call is to take the lead in seeing that their dissatisfaction is resolved.  Any product or service problems must be addressed and corrected before an invoice is due for payment.

This is _________, from _____________,  I am calling to make sure everything is satisfactory with ___________?  (Pause and wait for a response.  If the customer has a complaint, note what the issues are so they can be addressed immediately.)

If they are satisfied with your performance, your secondary goal is to check to see if the invoice was received, that the invoice is accurate and that the customer has the required information to process payment per the terms of the invoice.

We are pleased that you are satisfied with our performance.  Would you please help me confirm that our invoice has been received?  (Pause and wait for a response.)

(If the customer says they have it) ask if they have any concerns with the invoice?  (If they do, confirm their issues, then convey how you will resolve them.)

(If there are no issues with the invoice) Thank them for their business.  I will indicate, on my records, that everything is satisfactory, and we can expect payment on _______ (the due date).

If the customer has not received your invoice, immediately send a copy by fax or email, a hard copy duplicate by mail, then call them in two days to confirm everything is in order.

5. Protect your money by managing your A/R data to collect the money owed to you.

Don’t let a week pass without reviewing your Accounts Receivable Aging List.  This is the only way to know who is past due and is at risk of paying late.  The key is to establish the A/R amount owed for every invoice from the invoice submission date, not the due date.

If you are using the cash management system to help you ensure that your cash outflows never exceed your cash inflows, you do this critical collection process step every week when you update your accounts receivable collection projection in the Cash Management tool using the A/R aging report.

Another critical success step in managing your A/R is a weekly in-person review of Past Due accounts by the Office Manager or Finance Lead with the owner or president.  The most senior leader in the business show how important getting paid is when they insist on weekly A/R aging updates.  Keeping senior leadership aware of the number and frequency of customer contacts and any arrangements for payment that have been made position them to recognize when they need to get directly involved in working the collections process because follow-up needs to come from the top.

Your A/R data tells you who owes you what by when.  Knowing this is how you position yourself to do persistent and constant follow-ups with those who owe you money.  Your A/R data also tells you when it’s time to become more assertive in your collection activities.  Note: never threaten legal action unless you intend to follow through.

6. Your A/R collection process resumes 3-days before the invoice is due.

This first collection follow-up call occurs before the account becomes past due.  This call aims to eliminate delays that cause delinquency by reinforcing with your customer that you manage your A/R and know when your monies are due to you.  The sooner you receive a commitment to be paid, the less likely there will be a problem getting paid on time.

A company representative calls the customer or e-mail as determined by the method of contact agreed to upfront three days before the invoice due date to confirm payment has been processed.  Often this action alone will produce the desired response leading to an on-time payment.

If the answer is no, requesting the payment be sent out by the due date or offering to pick up the check is an effective method to ensure timely receipt of funds.  Another option is to request payment by credit card while on the phone.  These methods will “train” and reinforce with your customers to issue future payments within the “mutually agreed to” due date timeframe because they know you will be following up.

7. Continue proactive customer payment outreach until you get paid.

It is essential that those assigned the A/R collections process know that they are accountable for ensuring that you get paid.  This means that some customers will contact them weekly by phone or email regarding Past Due balances and more frequently if over 60 days past due.  Results from each call are to be noted on the scripted call sheet.

Your next telephone contact should be made within two days after a bill becomes past due.  I.e., the payment due date established at the time of order acceptance.

This is _________, with ______________. I am calling regarding our invoice for $___________ that our records indicate is past due.”  (Pause and wait for a reply.)

Your “Tickler” file keeps you from missing your scheduled callback dates.   Always make these calls after you have gone through the day’s mail to verify if the promised payment was received.  On these types of follow-up calls, identify yourself and say,

On ________ you promised me that you would pay $________ by ________ (date). We have not received the check.”  (Pause and wait for a reply.)

If they have not mailed the check, determine why?  Get another promise and inform the person you will call that day to get the check number or stop by and pick it up, as applicable.

Remember, the people that owe your company money are people just like you.  Always treat them courteously and with respect while collecting money that is due.  Avoid humor as those unable to promptly pay their bills do not find the situation funny.

If your A/R collection follow-up phone calls fail to obtain the payment you are owed, written notices must be sent out.  Below are sample escalation letters included with this value practice for use with those customers who are past due depending on their A/R days outstanding.

8. Don’t be shy about applying a credit hold against those who don’t pay you.

All accounts delinquent past 45-days should automatically be placed on hold as far as any additional charges are concerned.  The credit hold should be brought immediately to the sales representative’s attention with a copy to the Owner when this happens.

An account on hold may be released only by the Owner.  Once that account has paid all outstanding balances in full, a reassessment of their creditworthiness must be made and any further extension of credit approved by the Owner.

9. Eventually, you have to write off an uncollectable invoice as “bad debt” if you can’t get paid.

If the collection escalation procedures have not been successful after 90-days, the account should be brought again to the Owner’s attention.  At this time, a decision must be made as to how long the account can be given before being written off, turned over to a collection agency or attorney for legal action.

It is always more desirable to get a commitment from a customer to make regular payments, even in small amounts, rather than have to pursue other methods.

When all other collection efforts have failed, a registered letter should be sent to the customer. Here, you are serving formal notice that unless payment is received within 10-days of your invoice date, the account will be turned over to a collection agency, attorney, or IRS as appropriate.   See sample letters in the link below for access to the A/R collection process management tools.

Note that whatever the decision is made at the 90-day past due mark, it must be followed through.

10. Ultimately, the success of your business is proportionate to how proactive your company is in managing your A/R.

Those who don’t let customers go delinquent have improved cash flow and profitability vs. those who allow customers to pay late.  It is never acceptable to wait for your customers to pay you once their account becomes past due.

Accounts Receivable collections are just as important as Gross Revenue.  This means that your A/R data must be up to date and accurate so that you are in a position to manage a proactive, not reactive A/R collection process.  A/R collections are one of the essential tasks of the finance department.

Successful companies execute their collections process daily, not just when cash flow is poor as the last resort to find needed cash.  Disciplined adherence to your A/R collections process is how you improve the results of your collection efforts over-time for all past due accounts because those who do business with you know that you stay on top of your A/R.

Click here to access the BusinessCPR™ turnkey A/R collections management tools, ready for immediate implementation in your business.