It is essential to collect accounts receivable in a timely manner, thereby generating enough cash flow to support company operations. Rapid collection also improves the ability of a company to use its receivables as collateral for loans, since newer receivables qualify for treatment as collateral.
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:
Internal Problem Resolution
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 services, 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.
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:
- Posting. Immediate posting of cash, so the collections staff is not calling customers about invoices they have already paid.
- Database. 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.
- Staff support. Administrative staff that keeps all unnecessary distractions away from the collections staff.
- Staff scheduling. Work scheduling that keeps the collections staff from being involved in any activity other than collections during peak calling hours.
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:
- 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.
- 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 the sales staff in the collection effort for larger or more difficult collection tasks, where their customer connections can be of assistance.
- Offer to take back goods for which it is apparent that payment will not be received.
- 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 against the customer in small claims court.