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
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.