The due date comes…the due date goes and a new reality sets in: Will your customer pay? How will you know when a good customer suddenly begins to struggle? Most likely, you won’t. But the threat is real, and solving this challenge is key.
Late payment and payment default situations like these occur with alarming frequency. That makes it critical for the financial health of your company to minimize them. So how can you mitigate this risk?
Below is a matrix for overhauling your organization’s AR collection procedures based on three tiers of strategy: Foundational, Defensive, and Offensive. Want a hint? Focus on the offensive.
|Systems & Contracts||Processes & Documentation||Insurance & Intelligence|
Foundational Accounts Receivable Collection Procedures
Get back to basics.
Setting up and maintaining systems and standards is essential for mitigating you’re A/R risk. Make sure that invoices are sent out regularly by adhering to a repeatable process. Call customers before invoice due dates and take steps to address non-payment the minute that a receivable becomes overdue. Sending notices of late invoices will help to highlight the issue, and the practice provides a valuable paper trail so that you are prepared if you need to escalate the matter later. Include this documentation in the onboarding of new back-office staff.
Give your policies a make-over.
Institute new policies to protect your business, and set a calendar reminder now to revisit your process again a year from now. Many companies use down payments, cash-up-front terms, retainers, or milestone payments to minimize the amount they could lose.
Another option could be to keep an alternative form of payment on file such as a credit card, and include in your agreement a remedy to charge the account in the case of a missed invoice.
Secure the signatures.
Establishing a clear, signed agreement is key for an option like this. While these options insulate you from some or all of the receivables risk, they may impact your competitive edge: if your competitors offer open terms and you require cash terms, you may lose business.
Establish a digital filing system for signed agreements to insulate your company from some (or all) receivables risk. Ensure that all contract documents are easily accessible and set your system up to receive e-signature documents as well as scans. Don’t let things live only in email.