5 Tips When Collecting Commercial Debt Payments
Having a high accounts receivable (A/R) turnover to cash ratio is ideal for any size business. The faster customer invoices are collected, the sooner you can put that cash flow back into your company’s practical operational endeavors toward making more money.
Reduce debt and fund growth! Having a high A/R turnover ratio can indicate a high degree of A/R management efficiency, high customer quality and appropriate credit policies. While net sales and fluctuating market factors must also be taken into consideration when assessing your company’s A/R turnover, a few simple debt collection mistakes can be detrimental to your success.
Be sure to follow these five key strategies to set your company up for success:
Determine a Collection Period
An effective and efficient A/R management system positively impacts overall operations; from sales to collection of receivables. Before extending credit to commercial customers, determine when you will need to be paid. This “collection period” or “net term” depends on many factors, including industry standards, location, company size, cash reserves, etc. This period of time should be as short as is reasonable and acceptable, typically between 15 and 45 days. You may want to consult with a CPA experienced in your company’s industry in order to establish a collection period that is right for your business, as it will significantly impact how your company operates.
Send Itemized, Accurate Invoices In a Timely Manner
Establish clear and open communication with all commercial customers early in your relationship. Be decisive about payment terms and put it in writing. Follow-up any phone or in-person communication with an email for good measure. Make sure the email enumerates detailed, agreed-upon specifics for mutual clarity on products/services, prices, delivery times, invoice net terms, etc.
Once your end of the transaction has been completed, send an invoice in a timely manner; don’t wait! You don’t want to give your customers an excuse to pay late. Electronic invoicing software (there are many free and inexpensive options) is a simple, important tool which can drastically streamline your A/R management system.
Of utmost importance is that you make certain your company’s customer invoices accurately itemize the pricing details of the products/services purchased and delivered. Your customer businesses often require these details, and others, in order to meet their own internal A/P protocols so that your company’s payments can be en-route on time, free of unnecessary delays.
Invoice errors are an embarrassing and completely avoidable cause of A/R cash flow shortages. Ongoing invoice problems only perpetuate payment delays and may lead to distrust in business relationships, or worse, may cause customers to take their business elsewhere. Address any invoicing issues immediately and take the time to assure your customer that their business is important. If a customer is ready to walk as a result of a fairly serious or repeated invoicing discrepancy, be prepared to offer a pricing incentive as a measure of good will. Just be sure any incentive you do offer is financially viable for your business, yet still appealing to the customer.
Post & Deposit Payments Immediately & Generate Updated A/R Aging Reports Frequently
It is essential for your business to have an efficient, well-established method of maintaining records of payments owed and received. Although this can be done by hand ledger, it is much easier to input and track payments via an electronic system that also tracks and supports a process of customer payment accountability. In a practical sense, record keeping is crucial to fully understanding your business’s daily cash transaction averages, cash flow projections, growth benchmarks etc. Longer term, accurate record keeping ensures you have the right information to support key decisions in protecting your company’s bottom line. Decision like when to engage a commercial collections vendor and/or whether it’s time to consider legal remedies to enforce payments owed to your company through the courts.
Creating a useful and informative A/R aging report, which categorizes all of your customer data according to the length of time an invoice has been outstanding, is key. Then it’s important to generate the report at least once each week to ensure you have the most current information at your fingertips. At a glance, your A/R aging report should instantly inform you of your company’s current and past-due customers, so that may swiftly and decisively act accordingly. Which customers need a periodic collection reminder? Which customers should have their credit line suspended? Which customers require the elevated resources of your commercial collections vendor? The information gleaned from your A/R report has the answer, and can also help you develop indebted customer behavior patterns among your commercial customers. As a decision-making resource with important, multifaceted application, your company’s A/R report is significant.
Be Assertive With Reminders
Once you discover a payment is past due, send your business customer a payment reminder email with invoice copies. Follow-up with weekly emails in addition to your regular mailed notices. Don’t be shy about requesting payment in a direct, professional manner. Strategically worded collection letters will often get the job done, if you prefer to avoid a verbal confrontation with your customers. It is important to act fast, and being diligent can ensure your invoice doesn’t get lost in the shuffle of what may be a disorganized A/P process, especially in the midst of any financial turmoil your customer may be facing. Remember, the likelihood of a full recovery statistically and continually declines as customer accounts age past 60-90 days. As great a tool as a collection letter can be, don’t let your wait for a response cloud your decision on turning matter aged past 90 days over to your professional. Many companies send an initial, follow-up and final. However, this can depend on your unique business circumstances.
Create and Maintain a Credit Policy
Doing business with creditworthy customers usually translates to a lower risk of payment defaults while increasing the opportunity for a healthy A/R to cash turnover ratio. Make prudent decisions in developing the credit policies that will determine how much risk your company is willing to accept. Once you determine where you want your customers to be financially, maintain and enforce your credit policy without exception. Conduct credit background checks through a trusted source and speak to existing trade references before extending credit to new customers. Always be clear and straightforward with potential customers about your company’s credit policy.
The amount of credit extended to each customer should depend on their ability to repay a debt, which can be determined by their credit score, the presence or absence of red flags in their history and their willingness to comply with on-time payment terms. Your company’s credit policy can also reflect growth goals for the coming year, sales and financial objectives and the condition of the local, national, and global economies. Each customer’s credit should be reassessed periodically, and your credit policy should include actionable measures in the event a customer’s credit worthiness deteriorates, as well as incentives and rewards for customers with an impeccable payment record.
If a commercial customer has accumulated a significant amount of debt, a professional commercial debt collection firm should intervene on your company’s behalf.
Contact a Commercial Debt Collection Expert
Does your company periodically experience sluggish A/R cash flow? The permanent solution to any commercial debt collection problem is a simple phone call away. Contact Miller, Ross and Goldman’s dedicated team of master collection strategists today and GET PAID!