With an uncertain economy on the horizon and unpredictable interest rates ahead, improving a company’s cash position should be a major priority for any business. In most cases, the answer to this challenge is better control of accounts receivable.
Tuning up your collection system
Too often, companies allow their receivables to age to a point where the business is strapped for cash. It’s not uncommon for four or five months to pass before management takes action to collect past due accounts, usually because the company doesn’t have a clear collection policy.
Effective receivable control is based on a regular review of the company’s receivables. Ninety days from the date a receivable becomes past due is the point at which your company should decide whether it wants to continue to do business with a late-paying customer.
If a customer is important, a mutually satisfactory schedule for payment of past due balances should be set up together with an understanding that covers payment for future purchases. It’s important to resolve both of these issues at the same time to avoid future problems while the customer is paying off past due amounts.
If you can’t work out a satisfactory schedule for payment of the past due balance within a reasonable amount of time, or if it becomes apparent that the customer is in real financial trouble, it’s time to bite the bullet and turn the matter over to a collection agency.
An ounce of prevention…
Although there’s no guarantee that better control over accounts receivable will result in the timely payment of all receivables, there are several other steps that a company can take to reduce the age of its accounts receivable.
- Credit checking. It’s surprising how many businesses will accept orders from new customers without doing a thorough credit check. It’s the obvious way to head off future problems. And it’s just as important to make occasional credit checks for large existing customers to make sure that their credit ratings aren’t slipping.
- Applications for credit. A credit application is another basic technique to reduce collection problems. At the least, a company should know the names of its customers, owners, banks, and major suppliers. Not only is this information useful for immediate credit decisions, but it can be essential if a collection problem arises in the future.
- Customer communications. There’s no better way to assure improved collections than to make certain that a new customer understands that your company must be paid in a timely manner. If a customer doesn’t get a clear message to that effect, you can give the impression that prompt payment isn’t really important to your company.
It’s just as critical to keep in touch with new customers to find out if they are satisfied with your product. Make every effort to do this before payment is due, to avoid future excuses for delayed payments because of problems you didn’t know about.
Invoice discounts and late payment charges
Offering customers a discount for prompt payment usually won’t speed up your collection. In fact, it can often backfire because customers take the discount but don’t fulfill the terms. It’s much better to bill a net amount and clearly indicate terms of payment on the invoice.
Some companies charge a penalty for past due payments, but unless a customer is made aware of this in advance, the customer is not legally obligated to pay late charges. It’s best to stick with conventional invoicing and tighten up your internal controls over receivables.