Accounts Receivable Protocol
Whether you need to develop your entire accounts receivable procedure or simply want to improve on existing policies, the process begins by understanding your current state and conducting a gap analysis to determine how your performance compares to industry peers, competitors and best practices. From there, you can identify the steps you need to take to close those gaps.
First and foremost, you need a process – clear and concise policies for issuing credit and recovering debt in a timely fashion.
You’d imagine that billing is fairly straight-forward, but companies often struggle in this area. Some make consistent invoice errors regarding units of measure, price, customer accounts or other inaccurately reflected master data. Some fail to generate invoices in a timely fashion – or at all. Sometimes, team members make an end-run and bill outside the system. In other cases, companies bounce back and forth between mailed and electronic invoices, resulting in confusion. The key here is to establish a billing process that ensures accurate invoices are sent on a timely basis.
To do this, organizations should consider the following strategies:
• Automation - this can reduce time and human error
• Effective invoice generation and reporting - this will ensure billing is completed in a timely manner, and provide reports relevant to the end-user
• Electronic billing systems - EDI/electronic invoices can reduce delivery time and allow customers to download their invoices directly into their own accounting system
• Exception reports - can help to flag account anomalies (i.e. sales exceeding credit limits, discount rates above company policy, etc.)
• Customer portal - a tool that links the client directly into your system, often reducing manual hours dealing with cash applications, disputes, collections, etc.
While every business appreciates timely receipt of revenues due, not all organizations take a proactive approach to ensure receivables are collected within the pre-determined acceptable time. This is often due to weak processes.
For instance, a lack of reporting can make it difficult – or impossible – to determine which amounts are collectible and which may be in danger of default. Similarly, failure to adhere to the company’s credit or collection policies makes it harder to determine which payments are late and which will never arrive.
Of course, before they can follow up on late payments, your staff members also need assurance that the accounts receivable reports are accurate as of today and that there aren’t days, or even weeks, worth of cash receipts that have not yet been applied to customer accounts. This usually requires a robust accounting process. At the very least, there should be a running record of where an invoice lies within the 30 day due cycle, ie. Is it over 30 days but under 60? Over 60 days due, but under 90? etc.
The goal is to receive payment within 30 days of invoice date. The following timelines help guide the collection process that may extend beyond 30 days.
Start date – Send invoice
30 days - Invoice Due Date
Action: confirm receipt; if none, move into 30-60 days receivable list.
Action: Friendly e-mail from A/R regarding status; include copy of invoice with reference to invoice date and due date (gentle reminder this is now past due).
Action #1: E-mail copy of Statement of Account together with invoice; note "Past Due" on messaging and directly on invoice.
Action #2: Follow-up by phone if necessary, letting them know you’ve re-sent the invoice; ask kindly but firmly for commitment to payment date.
Action: Alert internal champion (salesperson or employee with closest relationship); ask them to reach out by phone or email; ask if everything is OK? Was invoice/statement received? Offer to take Credit Card Payment.
If client is evasive, ask when we can expect to receive payment. Get commitment to a date; mark it on the calendar and follow up (if necessary) on that date.
Action: Email and phone call from A/R: "I gather you spoke w [Salesperson]…just checking to see where payment is at…".
Still friendly tone; again, offer to help solve problem by taking credit card payment immediately.
If client is evasive or not responding appropriately, remain friendly and optimistic, but ask directly if there's a problem, and/or if there is a date in the very near future that they can commit to for payment. Secure that date and get agreement that you can expect it then. Note that date for potential follow up.
Action: Ask [Salesperson] if they want to call again, or feel interest invoice should be sent out.
· If [Salesperson] calls, tone still to be friendly, but one of "Management is giving us some flack, and I offered to help...how can I help? Any idea where we're at with payment?" Try to secure a commitment to payment by a specific date.
· If sending interest invoice, send with Statement showing original invoice amount(s), plus interest invoice, and resulting balance due. Interest is calculated at 2%/mo, compounded monthly, dating back to the original invoice date.
Action: IF INTEREST INVOICE SENT, [Salesperson] to call, inform client it was sent (ideally before it gets there…) and apologize…
("you know accounting…" etc.). Then offer "if we can get payment looked after in the next few days (give me your credit card, or courier me a cheque), I'll see if I can get the interest waived". If payment arrives in a few days or a week, we will reverse the interest invoice.
Action: Bring all 135 days to management’s attention; A/R and [Salesperson] will be advised of next course of action.
Collections service to be engaged if no further action evokes payment.
Once all avenues have been exhausted, a collection agency may be the final resort. Most companies want to avoid this stage, as it is costly for all involved, especially if it gets litigious.
If you do use a collection agency, look for a reputable firm that is professional, reliable, and understands legal components of the collection process. Be sure to communicate your desire for collecting the amount due while still being respectful of the customer.
Other ways to maximize collection of receivables include:
• Engaging in frequent and consistent collection efforts. This includes bolstering staff skills if they lack knowledge on how to collect amounts owing from recalcitrant customers
• Negotiating payment plans that align to corporate collection policies
• Ensuring any discounts offered benefit the company and are implemented accurately
• Strengthening processes to permit accurate reporting
• Automating processes to avoid manual entry errors