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

Strategies and Techniques to Improve Accounts Receivable Collection Processes

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 and improve accounts receivable collections?

Below is a matrix for overhauling your organization’s strategic 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

 

What is the Importance of Accounts Receivable Management?

Effective accounts receivable management ensures that money owed by customers for goods delivered or services provided is paid to the company in a timely manner. Effective accounts receivable management enhances company cash flow by preventing nonpayment or late payment.

Foundational Accounts Receivable Collection Methods and Procedures

The foundational accounts receivable 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.

Create a Process for Sending Invoices and Payment Reminders

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.

Once an invoice is 14 days past due, it’s time to reach out via an accounts receivable collections email. Make sure your email is respectful, concise and specifically explains that you are writing about a past-due invoice. In bullet points, summarize the details of the past-due invoice, including invoice tracking number, the principal amount, any interest or fees and a description of what the original balance is for — including dates and locations. Then, thank the recipient for swift payment or a call to discuss terms. Reference our accounts receivable collections letter template to help make this process easier.

Revisit and Improve Your Accounts Receivable Processes

Institute new policies to protect your business, and set a calendar reminder now to revisit your accounts receivable 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 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 Methods and 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 accounts receivable 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.

Create an Accounts Receivable Aging Report

One of the best ways to improve control over your accounts receivable is to create an accounts receivable aging report. This report provides a clear view of unpaid invoice balances and the length of time they are outstanding.

Typically, the accounts receivable aging report lists all clients and their outstanding invoice amounts, and sorts them by age, from current status to 1-30 days past due, 31-60 days past due, 61-90 days past due, 91-120 days past due and 120+ days past due.

Another important accounts receivable strategy is to calculate your receivables turnover ratio. This ratio shows how well you manage the credit you extend to your clients and how efficient you are at collecting payment. The higher the ratio, the better. To calculate your receivables turnover ratio for a six-month period:

  • Step 1: Add the accounts receivable total at the beginning of the six months and at the end of the six months.
  • Step 2: Divide that number by two to get your average accounts receivable total.
  • Step 3: Divide your total sales for the six months by the average.

For example, if your company had $10,000 in receivables at the beginning of six months and $15,000 at the end of six months, and total sales for the six months of $90,000, the receivable turnover ratio would be 7.2.. This means that receivables were collected about every 25 days (half a year divided by 7.2). The formula looks like this:

$90,000 ÷ (($10,000 + $15,000) ÷ 2) = 7.2

Offer Early Payment Incentives to Accelerate the Collection of Receivables

Incentives are another effective accounts receivable action plan to help maintain positive cash flow and avert late payments. To accelerate collection of receivables, you can offer a percentage discount to customers to entice them to pay the invoice on or before the due date.

Similarly, you can incentivize positive behavior (paying on time) by making sure your contracts stipulate that a late fee will be due if invoices are paid past the deadline. Another way to improve accounts receivable collections is to include language on your invoice that paying on time avoids a late fee penalty.

Incorporate Payment Plans

Cash flow problems can happen to any business. If a client informs you that they are having difficulty paying a bulk invoice, offering a payment plan is a positive accounts receivable strategy because it can help conserve the client relationship as well as ensure you get paid in-full.

If you offer a client a payment plan, make sure it is in writing and is signed by you and your client. It should detail the specific number of payments, amount of each payment and the payment schedule. In addition, with a payment plan in place for past-due money owed, it is wise to make all other sales to that client cash on delivery until the payment plan is completed and past-due monies are paid.

Offensive Accounts Receivable Collection Methods and 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 accounts receivable 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.

Investing in Trade Credit Insurance

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 the collection of receivables 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

The Euler Hermes TradeScore tool is an effective way to get at-a-glance understanding about the creditworthiness of your prospects and clients. Once you input your client’s or prospect’s identification information, the tool uses an application programming interface to access Euler Hermes industry data, as well as economic intelligence and market insights about that company. You receive a visual key to the client or prospect’s fiscal health. Green means the company is likely a reliable partner. Yellow means the company may pose some credit risk. Red means the company is likely a high credit risk.

Automate Your Accounts Receivable

Efficiency is essential to an effective accounts receivable management process. Among some of the best accounts receivable process improvement ideas is automation. By automating accounts receivable management, you can help standardize your process and deliver the most accurate data, while reducing the costs associated with payment processing. Data also show that automating your accounts receivable workflow often translates to faster client payment.

Proactive Debt Collection Strategies Are Where Winners Are Made

Offensive accounts receivable collections processes 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 eBook. It 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.

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