In a difficult economy when every dollar is important and vendors are stretched, I am amazed to find so many clients with outstanding receivables in excess of 60 days. Cash is in short supply these days and the banks are often reluctant to lend more debt when collateral is not adequate and the earnings do not support additional lines of credit. Business owners need to focus their attention on their receivables and make sure that past due customers are contacted and requests for payment are made with increasing frequency. Here is some simple advice for anyone with past due customer receivables:
1. Identify all past due customers and include them on a watch list by amount. This is important because additional credit needs to be granted very judiciously for any customer with a large past due balance.
2. Document each collection call and note the person with whom contact was made and a synopsis of the conversation.
3. Send follow up letters on a frequent basis asking for payment and clearly describing the amount and details of the past due amounts.
4. Keep an accurate aging of all accounts receivable and review the aging on a weekly or bi-weekly basis.
5. Track your progress on the accounts receivable to determine if the situation is improving or trending negatively.
6. Large past due balances in excess of 120 days should have a signed note from the customer agreeing to pay the amount as documented with specific terms for repayment.
7. New customers should be evaluated as appropriate for credit worthiness. Consider a credit reporting service such as Dunn & Bradstreet for larger accounts to determine reasonable limits for credit.
8. Accounts that reach 180 days with no payment activity or agreement should be written off for accounting purposes (establish an allowance for doubtful accounts) and sent to a professional collection agency. The agency will recover any old debt and keep a percentage (usually 35 to 50%) to pay for their time and expenses related to the recovery of the past due account. Keep in mind that 50% of something is better than 100% of nothing.
9. Post payments received and credits granted on a timely basis so collections are not deterred because the information is out of date.
10. Accept payment plans and reasonable installment payment agreements from customers that are important to the business.
11. Consider credit cards or cash on delivery from new or unreliable customer to minimize collection efforts in the future.
12. Withhold shipments or services from any customer that exceeds set credit limits or has a significant past due balance.
13. Keep a trend line by week of the average days sales outstanding (accounts receivable divided by the average daily sales) and compare to prior periods and industry standards to determine improving or deteriorating trends.
Follow the steps above as a part of your ongoing business practice and your receivables will be manageable and cash flow will be optimized.