Best Practices for Accounts Receivable Process Collection

As appeared in In Business Magazine, November 2012(

Best Practices for Accounts Receivable Process Collection  – by Dennis Niven (with content collaboration with Mr. George Bergmark III)

The cash-flow crisis resulting from inadequate AR collection practices in a growing business is generally the greatest threat the business will ever face. Even a profitable firm can be forced to close by the resulting cash crunch. Here are a few tips that, when taken as seriously as client service, will greatly help your collection efforts:

1)  Invoice clients in their own right time.  Rather than invoicing all clients at, for example, the end of every two week cycle, invoice them at just the right time to get necessary approvals for immediate payment.

2)  Deliver invoices electronically.  Whether through an electronic network, email or fax, don’t lose the several days it takes an invoice to travel through the mail to its destination.

3)  Document charges concurrently. If you have scanned in or copied all the documents related to an invoice, there’s no scrambling when it’s time to send it. Where are the receiving documents? Where are the POs? Project managers should track and scan or copy any documents related to an invoice on a daily basis.

4)  Delegate invoice collection to the person responsible for the work. The professional staff on the job on a regular basis is in the best position to know the person or persons that must authorize payment and field the “Yeah, but…” questions that accounts payable clerks are trained to ask. Collections are best done as a matter of course by the person responsible for the billing.

5)  Implement a process for prompt approval. Reviewing manager should have 24 to 48 hours to approve outgoing invoices; if not done, the approval request should be escalated up the chain for immediate approval. Consistently followed, this policy ensures timely approvals and invoicing.

6)  Offer a discount for early payments. Any amount less than one percent might not be worth the effort for payables to get it out early, but most companies are attracted enough by that one percent to take it.

7)  Before the invoice goes out, call those whom must approve the invoice before the client will pay it. This first call is an intelligence gathering mission as much as it is a quality control step. Verify that the job is going well enough to be approved and discuss any problems. Confirm that the person will be available to approve the invoice, or find out who will approve in the person’s absence. Flush out any objectives right away, rather than allowing problems to surface at the 60 days past due date.

8)  The forgotten relationship.  Account or project managers have relationships with client supervisors involved with the project, but they are forgetting someone… the one that controls the purse strings – the accounts payable (AP) person! You should get to know this person quite well, stopping by regularly when you are in the client’s office. Build a cordial relationship. Remember, to be the company that gets paid, especially when money is tight, means maintaining a relationship with the client’s AP contact.

9)  Call again, two days after the invoice was sent. This time call your AP contact. Make sure your invoice was received in the AP department and not lost on someone’s desk. This second phone call is still a call offering to be helpful.

10)  Call a third time the day the payment is due. If the company is holding onto their payables because they are having cash flow problems, reinforce your discount terms and suggest they pay discounted invoices only at that time. Even without discounted terms, you will find that this call from you, one of the vendors the AP person enjoys talking to, will help you get moved to the front of the list when there isn’t enough money to pay them all.

In summary. In a recession, even clients who have paid regularly for years can have cash flow problems. Slow payment requires human intervention; they are not solved by automated systems or a call one month too late. Companies with cash flow problems will put off every invoice they can, but vendors that fit comfortably within the client’s paper flow deadlines, are completely documented, and have better AP relationships are the ones that get paid.

“Best Practices for Accounts Receivable Process Collection” As originally appeared in In Business Magazine, November 2012

Copyright Dennis V. Niven, CPA 2012

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