How to Set-up and Collect Accounts Receivable
Comprehensive step-by-step procedure with tips, best practices, resources and document templates you will need.
Opening a business can be stressful, but imagine if you were not even getting paid? Without a concise, organised plan to collect on Accounts Receivable – any money a client owes you for services and/or products – your company may be unable to make money. Read on to learn how you get started.
Outline Payment Terms Policy
Set a time line for payment you find acceptable and identify what types of payments you will accept for your business. What kind of credit policies, methods of payment, interest charges, etc., will you employ? What about due dates, billing terms and frequency?
TIPs: 1) Select a due date for normal payments. This is usually 30 days, but depending on your service and/or product, you may choose 60 days or 10 days. This should all be in writing for the client/customer to peruse up front.
2) Set up a retainer. A lot of businesses that supply services employ the use of a retainer to ensure payment. Basically, before any work is done the client is required to pay a portion of the total. Sometimes this is half or a third.
3) It’s a good idea to check what your competitors do and decide if you want to offer standard terms in the industry or be a little more aggressive.
4) Refuse to work for clients who have a history of failing to pay for your services and/or product.
5) If you are starting a relationship with a new client, you might want to pay a small fee to get a business credit report from a trusted source.
6) Offer a discount for fast payment. Businesses and individuals alike enjoy saving money, even if it is only 5%. Charge late fees. In your established timeframe for payment, detail what fees may be charged if the payment is not made on time.
Checklists: Action to Improve Collection of Accounts.
Agreements: Discount on Prepayment Option, Reward for Prompt Payments, Offer 2% Discount for Speedy Payments.
After you have written out all the billing and payment information, assign a specific person in your company the job of keeping watch over it all. If your company is just you, develop an organised system for yourself. You might keep a date book with payment dates listed or utilize Google Calendar. Whatever system works for you, do not underestimate its importance. If you do not keep track of clients and invoices, you may be left working for free.
TIPS: Review accounts monthly to keep everyone up to date. Tab the 30, 60, and 90-day marks on accounts for easy review.
Worksheets: Collection History for Delinquent Account, Collection Report.
Spreadsheets: Debit Memo.
Keep lines of communication open between you and the client. Check in with clients via phone and email to make sure the service and/or product is working out. If there is a problem, you will know right away instead of in 30 days when the payment does not come in.
TIPS: 1) Always double-check your invoices before sending to a client. If you are unsure whether the client received an invoice, include a note to let them know to disregard if it has already been received. If the client finds an error, respond appropriately.
2) Make the invoices clear.
3) Send them precisely on time. Faxing invoices or emailing a .pdf is a great way to insure that they are received when your billing paperwork said they should. When calling on late accounts, always give them the opportunity to explain – there might be a mistake in shipment, invoices, etc. Do your best to resolve the situation peacefully so that you may be able to retain the client, especially if the problem exists on your end.
Correspondence: Request for Status Report, Sorry About the Mistake in Invoice, Letter to Customer Invoice Attached, Demand Future Payments by Certified Check, Deliveries Held Until Past Due Balance Paid, Collection Letter Clerical Errors, Request for Replacement of Check on Pending Order.
Templates: Sales Invoice.
Spreadsheets: Sales Invoice.
If the client/customer has not paid within the timeline set, follow your own guidelines. You may choose to send them a series of letters. Maintain a cordial, business tone in all communication. A client is much more likely to pay if they respect you.
TIPS: 1) First you send a Reminder Notice – often it is good to make these a short note on the invoice. Avoid getting too personal or confrontational, just say what they owe and that you have not received it yet and if there is anything they need from you to contact you. Also remind them of fees for late payment, if that is part of your billing cycle.
2) Next is a Past Due Notice. You may choose to hold other services and/or products until payment is made.
3) After the 2nd notice, you may inform your client that he or she has 10 days to make good. 4) If payment is still not made, you may choose to propose instalments. Last recourse is usually to employ an attorney, but you should try everything you can before that.
Correspondence: Notice of Payment 60 Days Past Due, Shipments Held Until Past Due Balance Paid, Instalment Payment Acknowledgement, Letter Agreement on Repayment Schedule, Collection Letter Offering Additional Discount, Collection Letter Requesting Contact and Proposal, Notice of Impending Litigation After Unproductive Arrangement, Letter Notice of Litigation, Demand to Endorsers for Immediate Payment, Grant of Request for Extension of Time.
Agreements: Instalment Payment Agreement, Disputed Account Settlement, Agreement to Compromise Disputed Account.
Last Options for Late Payment
Hopefully, if you employ specific guidelines, keep communication open and send proper, timely invoices, you will not have to employ a collection agency or a lawyer. Some people try with a collection agency first, then ultimately use a lawyer if the collection agency has not been successful.
TIPs: Depending on who is the delinquent client (financial means, reputation, etc) and the amount due (if you were to go to court), you should compare both the collection agency and lawyer options decide what is best for you. A lot of documentation is required for both options, so be prepared.
Checklists: Questionnaire For Hiring a Lawyer, Documents to Bring to Your Lawyer.
Correspondence: Notice to Small Businessperson in Advance of Collections, Collection Letter Before Sending to Agency, Transmittal for Collection, Collection Instructions to Lawyers.
Agreements: Assignment of Accounts Receivable With Recourse..
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