How to Manage Collections

Routine billing and accounts receivable management is, for most small to midsized companies, well handled by modern accounting software and can be done very efficiently.

Problems arise when customers pay late, don’t pay at all, go bankrupt, or dispute charges that stall payment. When these things happen, and they do, procedures should be followed that minimize loss and speed resolution.

What To Do About Late Payments

First of all, realize that some amounts owed by customers will not be collected at all or maybe only partially recovered. Some have collection costs (in terms of time or dollars or both) that exceed the value of the debt. These are best written off and are a cost of doing business.

When a customer balance becomes older than the criteria you have established by your credit policy, it should be addressed immediately. If the account is having cash flow problems, it is likely that other vendors are overdue for payment as well, and your customer may have to allocate funds between its vendors. This is the time to take action to stay on top of the customer’s list of priorities. Contact the company directly, person to person if possible. This conveys a sense of urgency and establishes good communications early on.

Sometimes customers fall behind in payments because of temporary or seasonal cash problems. In these cases, the customer can be placed on a C.O.D. or Cash with Order status to keep the business but prevent any increase in the amount outstanding.

You must decide at what point to begin collection efforts on a customer. Handling collections in-house is sometimes the most cost-effective and least hostile way to handle accounts that are not severely past due. If your company is not large enough to have a dedicated collection department, dealing with bad debts can divert time and energy away from other operations. Collection policy should include criteria for determining which accounts to keep in-house, which to outsource to collection agencies, and which to write off.

Collection agencies are a solution for accounts that have resisted internal collection efforts. These companies will handle all follow-up and necessary client contact and they usually pursue debtors aggressively. Agencies are expensive, however, and that will determine the size and type of customer to refer to them.

Finally, lawyers may be brought in to initiate legal action against a debtor, but they tend to be cost-effective only on large accounts.

The decision to start collection efforts with a client must be determined by your resources, the relationship with the client, an estimation of the probability of collection, and the amount outstanding. This should be a part of a credit and collection policy prepared prior to encountering serious collection problems.

Author: Marc J Marin