7 tips for improving collections
One of the most important and least enjoyable aspects of doing business is collecting accounts receivable. But manufacturers operate on tight cash-flow margins, so they can’t afford to become their customers’ bankers.
According to the Commercial Collection Agency Association, the probability of collecting on a bill drops to 70% after 90 days. And it plummets to 23% after a year. What can you do to collect more in the first 90 days without becoming downright nasty?
Here are seven suggestions:
1. Create expectations of prompt payment. Let your customers know when you expect to be paid. Be clear about payment terms when you arrange a sale. Put them in writing and include them with every sales agreement you make, regardless of whether the order is from a new customer or one you’ve been supplying for years.
2. Verify account information. Have your accounts receivable staff call customers to verify billing contact and address information, be sure the bills have been approved, and learn how long payment usually takes. Enter the information into your records and update it regularly.
3. Use your software. Generate an accounts receivable report and review it every month — or every week, if necessary. Then set up an automatic contact schedule that alerts your accounts receivable staff when new invoices are sent.
4. Follow up. If you don’t have a follow-up policy that involves more than simply sending additional invoices for them to ignore, now is the time to develop one. After 30 days, have accounts receivable employees begin regular telephone calls to clients who haven’t paid. If customers haven’t received or have misplaced an invoice, e-mail or fax a copy immediately. For those who have received invoices, staff should call every two weeks to see when they’ll send the payment. Again, you can set up automatic alerts to remind them when to call.
5. Be flexible, at first. Even the best-dressed customers can fall victim to cash flow problems, so work with them on payment plans if necessary. Be sure, however, that they genuinely need such plans and aren’t just stalling so they can hold on to their money longer. If customers know that you regularly extend your payment terms, they won’t be as diligent about paying on time.
6. Climb the corporate ladder. If follow-up calls and additional invoices haven’t worked after 60 days, have a manager speak to your contacts’ supervisor or, if warranted, the company president. Let it be known that you haven’t been paid and you expect the situation to be taken care of promptly.
7. Get tough. If a customer has become a deadbeat or if the outstanding balance is a large sum, it may be time to seek outside assistance from an attorney or collection agency. And, once the debt is settled, you may want to decide whether the customer is worth keeping. Customers who don’t pay are no better than companies that don’t order, and you may find it pays to fire a customer.
Collecting payment for the products you produce can be frustrating, but having and enforcing a clear collection policy will help. Keep in mind that customers who don’t pay are enjoying unsecured loans from your firm. That makes them debtors, not customers.
For more information about our services to inventory based businesses,
Contact: Mark Walker, Partner, Director of Inventory Based Businesses Practice at 817.882.7724.
The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.