Accounts Receivables collection becomes important when a customer or client fails to pay their bills, when they are due, and when they are due. It would be nice if everyone paid their bills on time … but this is the real world.
The AR report lists unpaid customer invoices, the main tool debt collectors use to determine which invoices are due. The AR collection process is used to estimate how long it will take customers to pay their bills.
Tips to Collect accounts receivable faster
Businesses, especially small businesses like yours, are constantly changing and evolving to suit their market. This means that there may be ways to improve the claims process if it goes well. Some of the ways to improve your accounts receivable collection business process are:
- Use of software: Various accounting software can produce outdated reports. They allow you to view the payment status of each customer. Your accounting software will also notify you when an invoice is due.
- You send an invoice immediately: You don’t want to waste time sending invoices to your customers. The sooner they receive their invoice, the sooner they will receive payment to you.
- Track payments: You don’t have to annoy your customers, but if they are late, further action can be taken.
- Use of electronic payments: Placing early can make the payment system more efficient. The easier it is for your customers to pay you, the faster they will deliver. Electronic payment options include PayPal, Venmo, Square, Google Pay, WePay and many more.
- Remember the payment plan: They can be a great choice for customers who are late paying off their debts.
- Hire a billing attorney: If late payments are a common occurrence in your small business, consider hiring a debt collection attorney. These lawyers can help you collect payments, process paperwork, and even represent you in court if necessary.
- Receive deposit in advance: This can be a useful strategy for making sure your small business gets paid. In fact, most of the smaller retailers are already doing it. For example, if you buy an item from Amazon or another online store, your account will be charged long before the item is received.
Best Practices for Accounts Receivables Collection process
For most companies, it is the responsibility of the accounts receivable department to manage billing. However, in some cases, customers may dispute an invoice and refuse to pay if they are not satisfied with the product or service they received. Billing errors and pricing issues such as promotions and discounts that haven’t been enforced are also common causes of controversy. When this occurs, other departments such as sales and customer service can step in to assess the problem and determine the best course of action. Oftentimes, problems are resolved before they are even considered bad.
However, if the dispute cannot be resolved, the account which is past due can become a collection. The process is usually as follows:
- Before taking any action, you must confirm that the customer actually issued the invoice.
- The customer then connects via an automated phone call or email and is reminded that their account is overdue. You will be asked to pay immediately or risk a penalty for delay or interest.
- If a customer does not respond within 24 to 72 hours, a representative can contact you by phone.
- Prepare a process – and follow it: Collections are an essential part of your financial business, and you need to set up systems and procedures like any other back office activity. Below is a sample communication plan aggressive enough to get you started. Day refers to the day after the due date of the invoice, which may vary by customer.
- 3 days: Call the customer to let them know the invoice is due and ask when you can expect payment. That first call can reveal issues preventing payment. Don’t just leave messages – keep calling until you talk to someone you know.
- 15 days: the first letter by mail
- 25 days: the second call
- 30 days: Send a second letter and take the customer into custody
- 35 days: a third call from a business owner or other executive
- 40 days: A final letter with a payment request or invoice is sent to the collection
- 60 days: Hire a third-party debt collection agency or attorney
- At the same time, letters were sent by mail.
In Detail explanation
- Creating invoice: The billing process starts with the payment terms specified in the invoice. The invoice must contain a section stating the customer’s terms and conditions. This can be a 15 day, 30 day credit term, or any type of prepayment such as: for delivery or payment at the time of order. The payment due date must be clearly indicated along with acceptable payment methods. Clearly describe the penalty for late payment on the invoice and provide the customer service phone number if you have any questions.
- Soon too late: If the invoice is past the scheduled due date, send a reminder to the customer. The letter includes the invoice number, due date, amount due, customer service phone number, and any penalties that have been added to the invoice. If you want to offer a customer a payment option as an installment plan, this is the time to share that information with the customer.
- 30 days past due: After 30 days, send a formal letter to the customer stating that this will be the second communication trying to collect the invoice. Relevant information from the promptly requested letter is included, along with any legal or remedial procedures the company may want to follow if the invoice is not paid within 60 days.
- 60 days have ended: Send final notification to pay bills, including penalties and fees due, by registered mail. Clearly describe the legal action or debt collection to be taken and encourage the customer to call the customer service telephone number to resolve the problem. The claim agent should try to contact the customer by phone to remind them that their account is overdue.
90 days expiration: If the invoice expires within 90 days, all activity with the customer will stop. Sell the invoice to a debt collection agency or send it back to the internal debt collection team and send a letter to the customer letting them know that their account is already with a debt collection agency. If you use an internal debt collection team, provide the customer with a payment deadline in certified mail. If the customer does not pay on time, legal proceedings must be initiated.
This process can be repeated several times depending on the company’s grace period. Average collection time is 30 days and payments are considered overdue after more than 90 days. If the payment reaches the limit of 120 days or is considered bad, the account may be sent to a third party collection agency (or collection agency).
When should a collection agency be assigned?
One of the main components of generating cash flow is customers paying their bills. The procedure for billing sales receivables and accounts receivable does not wait for late payment. Collection agencies can be an expensive option, so they are usually used as a last resort. Collection agencies are only paid when they pay off debts. If they do this, it will cost between 25% and 45% of the total amount due. However, these agencies provide the necessary services to businesses that cannot afford to continue to provide resources, and they track down clients who are clearly unable to pay their debts. If your department wishes to transfer the account to a debt collection company, the following must be provided for accounts receivable:
- Contact attempts
- Contract or agreement signed by the customer
- Current customer contact information
When evaluating the business process of your AR handling, carefully consider your entire procedure. Only a few simple adjustments are all it takes to increase the efficiency of your small business. From there, you can further optimize your claims process and encourage your customers to pay faster. Remember, the sooner your customers pay, the sooner you can collect your accounts receivable. This leads to greater financial growth in the long run. So you can run your business safely.