Accounts Receivable Collection Strategies
CFOs, controllers and business owners recently gathered to discuss best practices and current challenges with Accounts Receivable Collection Strategies. Many ideas and comments were generated, as summarized below:
How do you structure or how have you modified your billing statements to be more effective?
Make the terms of the contract very clear up front. Strive to make them airtight legal documents. The contract may indicate remedies if payment is not received on a timely basis. Such remedies could include attorney fees, interest and penalties and identify legal jurisdiction.
Revise the accounts receivable statement by including more detail such as the customer contact and a brief summary of the project or of the sale. Emailing the invoice directly to the AP contact can help the payment process.
What modifications can you suggest to the accounts receivable process?
Hold face-to face meetings with new customers to set the stage for the process and outline terms of agreements, etc. It was also suggested that each page of the contract be initialed to reinforce the payment terms and agreement, and to gain buy-in from a higher level of management.
Consider using letters of credit. There are two types of letters of credit â€“ commercial and stand by. Commercial is used for typical payment schedules whereas stand by letters are employed when a customer withholds payment, is late or defaults. One attendee sees this commonly in international business and would like to see more of it domestically. In the construction and bonding industries, letters of credit are commonly used.
About half of today’s attendees have an individual focused on Accounts Receivable where relationships and consistency in follow-up work to your advantage. The cost of this person must be weighed against the success of your collections.
Charging interest has “trained” new customers to pay on time, but this tactic has not been as effective with existing customers. Interest can be used as a negotiation tool.
Watch for avoidance. Phone calls and emails that are not returned can be a heads up of bigger collections problems.
One attendee suggested calling at 45 days for bills that are due in 60 days to see if there are any issues that could delay timely payment. The majority of group provides monthly accounts receivable reports to owners and management, and a smaller number provide reports weekly.
Get to know your customer’s Accounts Payable person or team. Get a contact in the AP Department and email or call them directly. Build a relationship.
Ask for a credit card up front to keep in new customer’s credit profile. This Credit card could be used as a back up source of payment. You may want to leverage the credit card to charge an additional 3% – 5% if the card actually needs to be used. This additional charge covers your cost to use credit. Also ask new customers for 2 â€“ 3 credit references before doing business with them.
Be accountable in both setting up and following through on the payment process. Make sure the sales team knows the terms and reinforces the process.
Engaging the Sales Team
Make sure your sales staff has a vested interest in getting paid. Reinforce the mindset that a sale is not a sale until it is collected. Consider paying sales commission when payment is received vs. when the sale occurs. Another idea is to use the sales staff to assist the collections efforts. Playing off relationships can be very effective.
Use a team approach and survey customers on customer service issues as well as accounts payable. Ask questions about sales satisfaction and accounting/administration. Assuring customer satisfaction on all fronts can eliminate potential reasons to withhold payment.
What strategies have you employed and found useful when customers are not paying?
Increase the use of partial payments. Offer this with limitations such as a one-time only offer, a new order that will be delivered COD or a post dated check in conjunction with a partial payment. Another suggestion was to break payments into smaller amounts throughout the year on annual contracts. Other thoughts were to develop a payment plan of action and to move the invoice timing up by a couple of days. The questions came up of what to do next if a request for partial payment did not work. Holding orders or getting a promise for the next payment was suggested.
Collection agencies and attorneys were not favored as an effective tool in collections. Participants found them to be expensive and generally the results were not worth the effort. Small Claims courts were also noted to be an ineffective solution. Even if the case is won, getting payment is unlikely. Getting served may get some results but if a case goes to court it is likely that you won’t get paid.
Modify the way collections are communicated. 90% of today’s attendees communicate collections via email. Some suggested leaving a paper trail or copying their boss on the communication. It was suggested to attach documents to the email showing delivery, receipt and sign-off. Another suggestion was to make sure the collection email is an all inclusive statement.
Document all customer communications. Rely on documentation to verify terms of collection and alleviate any customer disputes. Have a documented collections process clearly outlining vital information. This detailed documentation may include the use of specialized software. ACA International (The Association of Credit and Collection) may be able to provide more information.
An answer to addressing “I’ll pay you when I get paid,” is that it is not in our agreement. You may also have to reduce your customer’s credit limit, based on the reduction in your credit.
Sell in smaller increments. For example, a 15 day supply vs. a 30 â€“ 60 day supply.
Consider progress billings or offering a discount, especially on a larger order. Another idea was to offer variable pricing, depending on the length of the payment terms.
Factoring accounts receivable was noted to be very expensive. Terms may limit customer types, concentrations, or industries. Typically 85% is advanced with an effective interest rate of 13% – 24%.
Is anyone getting financial information from customers?
This group has not been, but it was suggested that if you ask, promise confidentiality of the information, or use an intermediary who can confidentially review the financial information and give you a recommendation.
When do you say NO to a sale?
Say no up front and avoid getting the bad news later. Say no when it will affect how you run your business. Once a payment is outside of 90 days, you become your customers’ bank.
Does anyone buy reports to assess customers’ ability to pay?
The group agreed that D&B is generally not reliable, either because it is out of date or sufficient information on bad credit risks has not been reported to D&B. Experian credit is more reliable. Sometimes simply googling a company will show if there are news reports or information that could add to your assessment of a customer’s credit risk.
What about Accounts Receivable Insurance?
While this type of insurance can expand the line of credit, the insurance is costly and selective in which customers qualify to be insured. Some firms do not cover the Big 3 and are very selective in what they do cover. Although none of today’s attendees use accounts receivable insurance, AIG and Euler Hermes were thought to be worth investigating.