How to Fix 5 Common Mistakes in Accounts Receivable Collections

Young troubled businesswoman with hands on head

In an ideal world, customers pay their invoices on time and you have one less thing (A/R Collections) on your to-do list. Unfortunately, the reality for most companies is that they’ll need someone in the accounting department to send a collections letter or make some calls to follow up on past-due accounts. Like anything else, there’s a right way and a wrong way to do it. Here are 5 of the most common mistakes in accounts receivable collections … and how to fix them.

MISTAKE #1: You Don’t Have (or Follow) a Credit Policy

Many small and medium-size businesses do not take the time to create, implement, and follow a credit policy. Businesses often rack up past-due accounts and debt because they never established terms for who qualifies for credit and take on customers with little or no assurance that they will be able to pay their bills. In short, you can’t just extend credit to every customer who asks for it. You need established policies and procedures into place to ensure you’re only offering credit to those customers who can and will pay you on time.

How to Fix It

Establish a credit policy and ask customers to fill out a credit application. This provides you with all of the information you need to decide if you should extend credit and how much. Also ensure that employees have access to written guidance of your credit policy so it’s fairly and consistently implemented across your business.

MISTAKE #2: You Wait Too Long to Act

Let’s face it – asking for your money isn’t very fun. So it’s easy to simply kick the can down the road in hopes that your customer will pay you soon without having to ask. But that’s a mistake.

Simply knowing that there are past due accounts, but not taking immediate action, can make the problem worse. For many companies, the first sign of a potential collections issue is at 30 days past-due. If you wait too long to follow up and try to secure payment, things can easily snowball and turn into 60, 90, or even 120 days past-due. It’s like the old adage “the squeaky wheel gets the grease.” If you aren’t on top of things and reminding customers – early on – that they have outstanding invoices, they may end up paying other creditors before you. And studies show that the longer receivables go uncollected, the less likely they are to ever be collected, either partially or in full. 

How to Fix It

Make sure you have a system in place (ideally AR Collections Software) so that as soon as an account becomes past due, either someone in the accounting staff or your in-house collections manager follows up immediately. Using pre-written letter templates and call scripts helps to ensure your communication gets out the door in a timely manner and can alleviate the urge to procrastinate.  In addition, any good AR Collections Software application will deliver automated alerts based on invoice activity and pre-determined aging buckets.

MISTAKE #3: You Assume Collections is Just an Accounting Problem

When you think about accounts receivable collections and overdue invoices, most people assume it’s just an isolated problem for the accounting department. But that’s not totally accurate.

A/R collections represent the last part of the sales process and completes the customer experience from order to payment.  In that way, it could be considered part of the customer service experience because each interaction – including their communication with your account or collections department – can impact how a customer feels about your company and how they interact with your sales reps. The payment process – whether it was easy or stressful – can impact whether they choose to do business with you again or not.

How to Fix It

Involve your entire organization in accounts receivable. Your sales team can help the collections process very early on by carefully qualifying customers and their ability to pay. The business culture in some companies is such that the sales team sees the credit collections department as an obstacle to opening new accounts and closing deals. To the contrary, sales and collections should be communicating and working together to preserve great customer relationships and positively impact your company’s ability to win new and repeat business. To take it a step further, management can actively reinforce this concept of cooperation by basing sales commissions on payments collected rather than invoiced amounts.

MISTAKE #4: You Offer Limited Payment Options

Question: Who loves writing a check, sticking it in an envelope, applying a stamp and mailing a payment?

Answer: Not many people. Especially in today’s digital age.

In some cases, your customer wants to pay their invoice but can’t because of cash flow problems. They won’t necessarily come out and say it. But when you only allow one or two payment methods, you’re inadvertently restricting your clients’ ability to pay. Offering a variety of payment methods can give overdue customers a chance to settle their account with you in a way that they can financially manage.

How to Fix It

Offer several payment options (and even payment plans) so your customers can handle their own cash flow while still paying your company what they owe. Especially in this day and age of electronic transfers and bank-to-bank processing, cutting a check or putting it on the company credit card are no longer the only payment methods available. The more options you provide to your customers, the more likely they will pay you on-time.

MISTAKE #5: You Try to Manage Collections Manually

Whether you have a part time A/R clerk or a full-time credit collections manager, there is an overwhelming amount of work that must be done to collect payment on past-due invoices. And things are made even worse when you rely on manual paper-based processes and spreadsheets to manage customer communications and past-due accounts.

If your company has not implemented some kind of system that can produce automated alerts and reports of your current 1-30, 31-60, 61-90 and over 90-day accounts, then you can’t even begin to take the appropriate action on past due customers.

How to Fix It

The templates, call scripts, tools, reports, and dashboards provided by AR Collections software can be a real game-changer.  It gives collectors, managers, and executive’s instant access to both basic and advanced metrics to help them better understand the current state of account receivable and cash flow with in-depth insight into critical data and reports like:

  • Average days to pay
  • Current days sales outstanding and trends over time
  • Cash flow summary
  • Top delinquent accounts
  • Summary of collection activities
  • Percent of overdue receivables
  • Average time to receive payment per invoice
  • Accounts receivable turnover ratio
  • Current A/R aging by invoice date
  • And more

Hiring more employees is not always the answer to your accounts receivable problem; it’s often the process and tools being used that can slow things down, delay customer communications, and create more problems. By utilizing accounts receivable management software, you can achieve tremendous efficiency gains without the overhead cost of adding staff.

The Ultimate Guide to AR Collections

If you want more tips like this, click below to download our Ultimate Guide to AR Collections where you'll find 27 pages of expert advice, best practices, industry benchmarks, and loads of letter templates and call scripts.

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