The importance of establishing and maintaining a sound professional collection procedure within your organization cannot be overstatded. A well thought out collection procedure is as essential as the actual sales for the profitability of the company. Slow paying customers create significant cash flow problems as well as costing the company time and money to make the collection. Regardless of the profitability of the sale, if the company fails to collect, you lose the cost of the labor and delivery.
The following are the principle elements of any good collection policy:
- Timely billing with well-defined payment terms. Since payment terms may vary, they should be covered on your invoice and statement.
- Persistent follow-up using standardized collection procedures.
- Accounts Receivable Aging List: Prompt collection of money due is necessary to lessen the chance of loss. Statistics show that the older an account becomes, the greater the risk of not collecting. Poor follow through on collections can wipe out good sales efforts and excellent performances by your personnel. They also add to all costs incurred and must be accounted for in the cost of other sales.
Accounts Receivable Policies
Managing Invoicing: The first step in implementing an accounts receivable system is developing policies and procedures for invoicing. A business can speed up collection by issuing invoices as soon as the sale is complete. Internal policies must detail when the sales department should report sales and when the accounting department should issue the invoice. Procedures detail what the sales report must include, how to prepare it and where to send it. Accounting procedures give the details of invoice preparation, verification, data entry into the accounting software and invoice mailing.
Collecting Receivables: Collect the amounts due as rapidly as possible. If a company operates in an industry where payment in 30 days is the standard, it can offer discounts or incentives for earlier payment. Regular reminders to customers with overdue accounts are an effective tool. Policies specify the standard payment terms, any discounts and a schedule for reminders as well as consequences for late payment. Collection procedures detail tracking payments, entering receipts into the accounting system, sending reminders for late payments and initiating additional collection actions.
As a business owner, remind yourself that
1. Accounts Receivable collections are just as important as gross revenues.
2. Collections need to be done on a daily basis, not only when cash flow is poor as a last resort to produce extra cash.
3. The maintenance of an up to date and accurate list of Accounts Receivable and a strong collection procedure is one of the most important tasks of good business.
Using Aging Report as a Decision Making Tool
An accounts receivable aging report show who is paying on time, 30 days late, 60 days late and 90 days late. Use this financial statement to determine which customers are in good standing, are in need of collection efforts or have uncollectible open invoices (if an invoice has not been paid within six months, after collection efforts, this is probably an uncollectible debt).