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Collection Advice for Internal Receivable Management

Receivables and cash flow are the life line of any and all businesses large and small.  Delinquent accounts are one of the leading causes of business failure and therefore require immediate action.  There are several surveys that illustrate how the probability of collecting an account drops dramatically in a short period of time.  A recent survey of the Commercial Law League of America revealed that the probability of collecting a delinquent account drops to 73% after only 3 months.  After 6 months, the probability drops to 57% and after one year the chance of ever collecting on a past due account drops to a dismal 29%.  The results of this survey clearly demonstrate the critical importance of taking positive action when an account receivable ages past its due date.

Companies must take a hard line on past due receivables, and turn to professional help when their efforts do not prove successful.

5 Things to remember when dealing with delinquent customers and deciding whether or not to take affirmative action:

  1. Your customer was aware of your terms when they agreed to do business with you.
  2. They failed to maintain their end of the agreement or promise.  Not you.
  3. As per the study above, collectability drops with every pass day of delinquency.
  4. The laws and legislation are favourable to those who choose not to pay their creditors.
  5. While you are being neglected, other creditors are getting paid.  Those other creditors are seen as more important.

What can you do internally to minimize and better control problem accounts?  Below are a few basic suggestions that to some may appear as common sense, but are often set aside in the name of "customer service".  Remember, customer service, involves privileges that are extended to valued customers that adhere to your policies and keep their own promises and commitments.

Collection Advice for Internal Receivable Management:

  1. Don't Assume: While there are usually established credit practices in every industry, there are also several differences.  It is important that customers know what your credit policy is in order to eliminate misunderstandings.  Reiteration of that policy, when a payment is first overdue, is the first step in facilitating payment.
  2. Know Your Customers: In today's economy, no company should extend credit without ascertaining the customer's reliability.  In the event, however, those records indicate irregular payments, that account should be kept under close scrutiny, with immediate follow-up even days after a payment is delinquent.
  3. Keep Credit Records Current: Companies are not static enterprises. Changing markets and management directions can quickly alter the health and stability of a company.  Keep abreast of trade reports on specific companies, especially those which are your current customers or potential customers.
  4. Review and Tighten Your Collection Procedures: Periodic review of collection policies and procedures is always beneficial.  Unforeseen events can never be eliminated, but you minimize your company's chance of loss by rigid adherence to your policies.
  5. Discourage Extended Payments: Be very particular regarding which customers are permitted to use extended payments.  Too many will not only endanger your company's cash flow, but also lead to undesirable precedents as well.
  6. Accept Partial Payments Only With Final Payment Commitment: While partial payments may show "good faith", and part is better than none, the best practice is to acknowledge part payments but demand a commitment for the balance.
  7. Shorten the Collection Schedule: Shorten the period, after a customer is late with a payment, for continued extension of credit.
  8. Keep Communication Open: Make sure you are getting through to the right person - the decision maker.  If a visit to the customer is necessary, do it.
  9. Resolve Disputed Matters Quickly: If your customer is using a dispute over quality of merchandise or service, price or delivery as the basis for non-payment, attempt to reach a mutually agreeable settlement promptly.  If a customer is withholding substantial payment over a minor dispute, insist that the undisputed portion be paid immediately.  Your better judgment and/or common sense will tell you when you have exhausted all the internal means at your company's disposal to negotiate a satisfactory payment. 

Remember the survey at the beginning of this section.  If your efforts do not bring results in the first 60-90 days, you should strongly consider seeking the help of a professional.

 

 
 
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