Improving the Collection of Accounts Receivable
Set expectations with your customers from the beginning and be assertive but not aggressive in seeking payment.

By Michelle Long

Many small businesses are so focused on getting customers and making sales that they forget to also be concerned with collecting payment for those sales. Collection procedures and methods are usually overlooked until there is a cash flow problem. The steps below can help improve the collection of accounts receivable and provide increased cash flow, as well as minimize losses due to bad debts.

Credit Policies and Procedures
Establish credit policies and procedures. Put them in writing and then stick to them. Will you require a deposit, retainer or prepayment? If so, how much? This helps confirm the customer's commitment and ability to pay.

How many days does the customer have to pay an invoice? Will you give a discount for early payment and how much?

How do customers qualify for credit (which is like a loan from your business) and how much credit will you allow?
Usually you shouldn't let customers go over their credit limit-they need to make payments or you should cut them off.

When you extend credit to customers, you're essentially loaning them your money (for free). Perform a credit check and get a completed, signed credit application. Keep in mind that you need more than just a post office box address in the event that you have to initiate collection procedures. If the business customer is incorporated, then you should have the owner sign a personal guarantee.
 
Reduce Collection Problems
Send an invoice to the customer as soon as possible. Consider e-mailing the invoice, which should help you get paid sooner and will save money on printing and postage.

Invoices should be clear and provide sufficient details, including a job number (if applicable) and a specific due date (not just "on receipt" or "net 30"). If the customer has any questions about the invoice, then it won't get paid as quickly.
Also, invoice frequently so the amount due isn't too large. Customers usually find it easier to pay invoices of smaller amounts more frequently as opposed to a large, monthly invoice. If they can't pay it all in full, they may pay other bills instead.

Also, keep in mind that customers are more likely to pay if they respect and like you. A good customer relationship is always important, so make sure to discuss any concerns your customers might have. Early in the relationship, and in a businesslike manner, explain your fees or prices and when you expect payment. Whenever possible, get agreements or contracts in writing.

Monitor Receivables for Overdue Amounts Frequently
Studies indicate that as an account gets older, the odds of collecting it decrease. Each week review an accounts receivable aging report. Follow up promptly on past due invoices with initial collection procedures.

Initial Collection Procedures
Start by sending a reminder invoice (or letter). Ask the customer to please remit payment by a specific date, and invite them to call if they have any questions or concerns.. Wait until a couple of days after the due date and if they still haven't paid, call them. Assume a friendly, yet professional tone and ask why they haven't paid. Usually customers don't pay because they were dissatisfied or they are facing financial problems. In either case, you should discuss the situation with them. If they were dissatisfied, you may give them a discount or concession of some kind. If they have financial problems, get them to agree to a payment schedule and then send it to them in writing to confirm the agreement.

If you are undecided on whether to call or send a letter, remember that a letter is easy to throw away and ignore. Always speak with the owner or manager, rather than a clerk or assistant. Only call during business hours, keep a log of your calls and discussions and don't call too frequently. If they won't take your phone calls, you might consider a personal visit. Call to schedule a meeting time, or leave a message stating when you will stop by to discuss it. Avoid aggressive collection tactics-you don't want to be accused of harassment or harm the reputation of your business.

Problematic Delinquent Accounts
If initial collection attempts fail, then it is time to consider a collection agency or attorney. There isn't a definite time when you should turn over an account for collection. Some businesses turn them over at 60 or 90 days past due when they think it is more collectable. Others wait until the account is 180 or even a year past due before they turn it over to collections.

When deciding which collection agency to use or whether to use an attorney, consider what procedures will be used, the cost involved and their reputation.

Implementing these procedures can help improve the collection of accounts receivable so your business can be more profitable and productive.

Michelle Long is the owner of M. Long Consulting, LLC, which provides QuickBooks consulting and training, business planning and financial consulting to growing businesses and entrepreneurs. Long was named the Small Business Administration's Financial Services Champion of the Year for 2007 and she is a speaker and author. You can reach her at (816) 524-7799 or .