Collection procedure

The collections staff may deal with an enormous number of overdue invoices. If so, the collection manager needs a procedure for dealing with customers in a standardized manner to resolve payment issues. The detailed collection procedure is listed below.

However, the process flow noted here only generally represents the stages of interaction with a customer. These steps might be shuffled, supplemented, or eliminated, depending on the payment status of each invoice.

  1. Assign overdue invoices (optional). When an invoice becomes overdue for payment, assign it to a collections person for collection activities.
  2. Verify allowed deductions (optional). A customer may submit a form detailing a deduction claim under the company’s marketing plan. If so, verify the claim with the marketing manager and match it against deductions taken by the customer. If a deduction can be traced to the allowed deduction, submit a credit memo approval form to offset the amount of the deduction.
  3. Issue dunning letters. Use the accounting software to print dunning letters at fixed intervals, with each one pointing out overdue invoices to customers. Review the letters and extract any for which other collection activities are already in progress. Mail the other dunning letters to customers.
  4. Initiate direct contact. If there are still overdue invoices outstanding, call customers to discuss the reasons for lack of payment. Following each call, record the details of the call, including the date, person contacted, reasons given for late payment, and promises to pay.
  5. Settle payment arrangements (optional). If it is necessary to accept a longer payment period, document the terms of the payments to be made, as well as any interest to be paid and any personal guarantees of payment.
  6. Adjust credit limit (optional). At this point, the collections staff should have sufficient information about the financial condition of a customer to recommend to the credit staff if a reduction or termination of a customer’s credit limit is in order. The credit staff is responsible for changing a credit limit – the collections staff only provides information.
  7. Monitor payments under settlement arrangements (optional). If there are special payment plans, compare scheduled payment dates to the dates on which payments are actually received, and contact customers as soon as it appears that they will miss a scheduled payment date. This level of monitoring is required to keep customers from delaying their payments.
  8. Refer to collection agency. Once all other in-house collection techniques have been attempted, shift invoices to a collection agency. At this point, the customer should certainly be placed on a credit hold list.
  9. Sue the customer (optional). If all other alternatives have failed, meet with the company’s legal staff to determine whether the company has a sufficient case against a customer to win a judgment against it in court. Also, the customer should have sufficient assets available to pay any judgment against it. If these issues appear favorable, then authorize the legal staff to proceed with a lawsuit.
  10. Write off remaining balance. If all collection techniques have failed, complete a credit memo approval form in the amount of the invoice(s) to be written off.
  11. Conduct post mortem. If there was a specific problem with the company’s systems that caused a bad debt to occur, call a meeting of those people most closely related to the problem to discuss a solution. Assign responsibility for action items, document the meeting, and schedule follow-up meetings as necessary.

It is more likely that the outlined collection procedure will be used by new collections personnel. More experienced staff should be allowed to vary their activities from this list, based on their opinions regarding the best way to collect from certain customers.