Many business owners find themselves with more accounts receivable than cash in the bank. Effectively managing accounts receivable will provide cash flow needed to successfully operate your business. The key to effective management of receivables is to establish, and consistently process collection procedures. Here are some guidelines that will help you design your procedures.
Billing and Collection Terms: Your billing and collection terms should be documented in writing on your website and in the initial paperwork each new client receives. This should detail your billing cycle, payment terms and advise them of the interest that will be charged on their past due balance. Contact your state for legal requirements in charging interest.
Payment Methods: Review your payment methods to determine if you should offer credit card processing. This is a great payment option to have available and may reduce your receivables significantly. Convenient online payments through your website is another option to consider.
Billing Cycle: Your collection procedures should be structured by your billing cycle. If you invoice monthly, you need to consistently invoice the same day each month. Doing this allows you to design collection procedures by the aging of the invoice date.
Payment Terms: Establish your payment terms for your business and clearly state them on every invoice. For example, the billing term may be Due Upon Receipt and is considered late after 30 days from the invoice date. Check out what your competition is doing and stay within the same framework to be competitive.
Past Due Notice: Once the invoice is late based on your payment terms, calculate and charge interest charges to each account balance with past due amounts. Send statements referencing the PAST DUE amounts with a copy of the past due invoice(s).
Second Past Due Notice: In 15 days from the date you sent out statements, your efforts should be stronger. Mail a letter to the client advising them you will be processing further collection activity with an attorney or collection agency if payment is not received immediately.
Critical Past Due Notice: In 15 days from the date you sent the second past due notice, process the second month’s interest charges on the account. Mail a letter requesting payment and advise them you will be terminating them as a client unless payment is received.
Final Past Due Notice: In 15 days from the date you mailed the critical past due notice, mail a certified letter, with return receipt requested, advising them you have terminated them as a client and will be forwarding their account to a collection agency or attorney.
Legal Collection: Contact your attorney or collection agency to provide further collection activity as needed.
The guidelines can be adapted to fit your business but the most important aspects to include are consistent communications that are date driven. Adding a PAST DUE stamp in red ink to your statements will often get you results. You may consider offering a discount if paid within 10 days from the date of the invoice. Define the system that is right for you and your business. Be consistent and stay on top of your receivables. Your bank account will thank you.
Partner with a Pro at Holt Accounting & Tax Professionals, LLC to assist you in establishing your collection procedures. Call us at 770.656.0606 to arrange a consultation and get your cash in the bank.