Accounts Receivable Collection Techniques to Avoid Non-Payment - Empty Wallet Image

Accounts Receivable Collection Techniques to Avoid Non-Payment

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.

 

Foundational Defensive Offensive
Systems & Contracts Processes & Documentation Insurance & Intelligence

 


Foundational Accounts Receivable Collection Procedures

The foundational strategy tier focuses on establishing clear contracts with your clients and implementing workable systems to manage those contracts. Your contracts or written agreements should specify your terms of payment, cash-up-front or retainer stipulations, or any early payment discounts you offer to motivate clients to pay ahead of their invoice deadlines. Contracts should also stipulate parameters about starting work only after contracts or agreements are signed.

Stay organized and know where every contract is in the agreement process and the status of every invoice. Contact management systems and accounts receivable management systems can help you process, review and access documents faster, and more easily track and report on status.

Get back to basics.

Setting up and maintaining systems and standards is essential for mitigating your 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 requirement that an agreement or contract is signed before products or services are provided is a key component to an effective A/R process. Remember that the terms in your contract or 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.

Learn more. Listen to our podcast, Cash Flow Best Practices

The foundational strategy should be used as a portion of your overall A/R collection procedure. By itself, it will help show you what accounts may be overdue, and it can organize your contracts or agreements once a client is onboarded. But it alone will not help in managing your accounts receivables for better cash flow.

Defensive Accounts Receivable Collection Procedures

The defensive strategy tier focuses on establishing terms that your clients would be responsible for should you need to move to debt collection for a past-due account. In addition, to maintain and fine-tune your A/R collection process for enhanced performance, you need to establish a protocol to communicate your credit management process with your staff and a process for continued improvement in collection strategy.

Create a sufficient paper trail.

Work with an attorney to draft documentation that will support your actions and specify your customer’s agreement to cover all costs related to debt collection. This should include things like:

  • Contracts
  • Payment timelines
  • Third-party collection expenses
  • Late fees and consequences
  • Legal fees
  • Your company’s standard terms and conditions

This will ensure everyone is on the same legal page. You should also agree on a uniform naming convention for documentation. In order to collect on a receivable, you will need to generate documentation supporting your claim.

As part of your standardized process going forward, create a contract that specifies the work or products you provide as well as the payment schedule to which your customer has agreed, and require customers to agree to these terms when applying for credit terms with your company. These systems and processes should be documented and communicated to your entire organization.

Become an over-sharer.

Communicate your credit management process to other departments within your company; set clear limits on required actions and make people accountable. Make sure you are including customer-facing account staff as well.

Keep improving your accounts receivable collection strategies.

Set ambitious goals and actions for your A/R process, and periodically measure your performance to apply changes whenever and wherever necessary. This should include having your business development people in your post mortems on bankruptcy and non-payment situations so they can be learning what to look for when it comes to customer risk at the prospecting stage. Preventing non-payment is not a one-off project. It’s a process you must keep working at all year.

The defensive strategy is also a portion of your overall A/R collection procedure. It’s not designed to enhance A/R collection without the foundational and offensive strategy tiers in place.

Offensive Accounts Receivable Collection Procedures

Offensive accounts receivable collection procedures take a proactive stance, leveraging measures to insulate your organization from loss. Consistent data collection and monitoring of financial health, as well as taking out a credit insurance policy can work in tandem to help you evaluate customers and prospects who may pose a risk of nonpayment.

While a foundational strategy specifies the terms of contracts with customers and establishes rules for payments or discounts, a defensive strategy sets terms for clients who violate those terms, resulting in past-due accounts that need to be collected. While both a foundational and defensive strategy focus on the customer after they’ve become a customer, an offensive strategy serves as a layer of protection in evaluating risks before they happen.

Protect your assets.

As an added layer of protection, consider purchasing trade credit, or accounts receivable, insurance to protect your assets from loss, and mitigate future risk. Credit insurance specifically protects you against a loss to your largest and most vulnerable asset—your A/R.

A credit insurance policy with a leading carrier like Euler Hermes is more like a partnership with a worldwide network of risk management experts. The carrier provides data and insights to help you pick the right customers to begin with, monitors their financial health throughout the year, and reimburses you in the event a covered customer fails to pay. The investment in a credit insurance policy can often pay for itself multiple times over—even if a claim is never filed, simply by fueling safe, but aggressive, sales in the future.

Don’t go it alone.

Partner with experts to get data and insights to help you pick the right customers to work with. Monitor their financial health throughout the year, and get reimbursed in the event a covered customer fails to pay.

Pursue forward-facing research.

Check and monitor the creditworthiness of your prospective and existing customers, and implement a defined system for monitoring changes in financial wealth—particularly signs of financial distress. This process should be informed of the relative A/R risk of customers, with frequent checks for newer, smaller and less-stable companies. Have all your internal stakeholders take advantage of this intelligence.

If your company has not already formally done so, officially document your credit policies and procedures to define how creditworthiness is determined and monitored. This document should specify data sources including (but not limited to):

  • Bank and trade references
  • Credit report
  • Individual company financial statements
  • Ongoing monitoring of political risk and macroeconomic risk

Prudent credit management is a tough and never-ending job. You may want to consider augmenting your internal staff by partnering with capable experts to ensure efficiency and thoroughness. With success, you can accelerate invoice payments and help optimize the working capital your organization has to work with. This creates funds with which your company can invest in the future and proves the value of effective credit management to the entire organization.

“Even if you’re on the right track, you’ll get run over if you just sit there.” -Will Rogers

Proactive Debt Collection Strategies Are Where Winners Are Made

Offensive accounts receivable collections procedures is where Euler Hermes comes in. With Trade Credit Insurance, you get multiple benefits that enhance your A/R process. You are protected against non-payment, which ensures a stronger fiscal position for your company. You also have access to r esearch, data, and insights so that you can make even smarter decisions about which clients you extend credit to, which you don’t, and how to know the difference. That’s intelligence. That’s Euler Hermes .

Business is about reinvention. It’s about evolution. It’s about outsmarting the competition and making the right move at the right time. 

Want more information? Download the EHNA Non-Payment Checklist. It’s is a helpful guide for ensuring damage is minimized and the chances of resolution are maximized when it comes to a big customer who doesn’t pay.

Take chances, not risks. Be bold with Euler Hermes.

useful description of image if informative and not decoration only.
You can also call an expert at 410-316-6164
We're always producing new content to help businesses understand economic trends and navigate trade uncertainty.
Sign up for our newsletters to make sure you don't miss anything.
Subscribe Today