How to collect accounts receivable
/The collection of accounts receivable is vital, since it provides the cash needed to support company operations. Collecting accounts receivable is not just the task of the collections department. Instead, it calls for a company-wide effort, because collections can be improved before an invoice is ever issued to customers. Consider the following steps for collecting accounts receivable:
Resolve Internal Problems
A fair proportion of all customer invoices are not paid because customers are dissatisfied with the goods or services they have received. This is not the fault of the collections department. Instead, the senior management team must be involved in following through on each issue pointed out by customers, such as failed products, inadequate service, damaged goods, incorrect items shipped, and so forth. In many cases, the internal processes that caused these problems will do so again until corrective action is taken. In short, there must be an active feedback loop that sends customer complaints back to a core management group for ongoing problem resolution.
Related AccountingTools Courses
Credit and Collection Guidebook
Manage Collections
Anyone involved in collections must be given the time and resources to engage in collections in an efficient manner. The following items can help to improve the efficiency of the department:
Post Cash
Conduct an immediate posting of cash, so the collections staff is not calling customers about invoices they have already paid.
Install a Collections Database
Install a computerized collections system that tracks customer promises, auto dials customers, automatically e-mails invoices, and so forth. This greatly increases the efficiency of the collections staff.
Add Staff Support
Add administrative staff that keeps all unnecessary distractions away from the collections staff. The intent is to maximize the proportion of each day spent on collection activities.
Schedule for Peak Periods
Set up work scheduling that keeps the collections staff from being involved in any activity other than collections during peak calling hours.
Collection Techniques
There are a variety of standard techniques used to contact customers and extract payment promises from them. A sampling of the more common methods are noted below.
Issue Dunning Letters
Issue dunning letters or e-mails when it appears that customers need a mildly-worded reminder. Some companies use a series of these communications, each one with progressively more strident wording.
Focus on High-Dollar Invoices
Divide the overdue accounts receivable into groups, with the highest-dollar invoices receiving the most continual attention. Doing so focuses attention on collecting those few invoices that comprise the bulk of the overdue receivables.
Involve Salespeople
Involve the sales staff in the collection effort for larger or more difficult collection tasks, where their customer connections can be of assistance.
Take Back Goods
Offer to take back goods for which it is apparent that payment will not be received. Doing so minimizes the firm’s potential losses.
Take Legal Action
Involve a law firm in collections. Issuing notices on the letterhead of the law firm can convey the impression that the company is about to take legal action against the customer.
File a Claim
File a claim against the customer in small claims court. These claims are limited to relatively small amounts.