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Collection Best Practices

The sales have been made, revenue has been trending up for a while, and customers and management are happy. But you seem to be having some concerns regarding cash flow. Does it seem like you seem to be struggling to make payroll once in a while, or even pay some invoices timely? Is it possible that part of the problem could be your collection efforts?  The following are some simple strategies that could help your company with getting cash in the door quicker than anticipated.

Pre Approve Customer Credit

The development of a credit approval process should ensure that new customers are not extended credit beyond their immediate payment capacities, and that customers with credit problems are not extended credit at all.  As a result, new customers should be able to pay off their account on time, thus increasing cash flow.  In addition, the chances of a new customer account becoming a bad debt will be mitigated.

The development of a credit approval process should begin with an application by all prospective customers.  Once you have the completed application, inquiries should be made of the credit agencies, as well as the references listed. Finally, take this information and make an informed decision on whether credit, if any, should be extended to the customer. You might want to consider involving people from different departments in the decision, such as sales, accounting and maybe upper management.    

Lock Box Collections

The use of a lock box at the bank could be helpful if payments from customers are being sent to the wrong location, or becoming misplaced once they are received. Instead of sending payments directly to you, your customers will mail payments directly to your bank’s lock box. The bank will open the envelopes, deposit the funds in the correct account and forward you copies of the checks and remittances each day, week, or month, however you prefer.

Although your bank will charge a fee for this service, the time spent on the cash receipts process by your staff will be reduced which means the process will be more efficient.

Grant Percentage Discounts for Early Payment

Utilizing percentage discounts can significantly increase cash flow by reducing the number of days account balances spend in receivables.  The discount can be extended to all customers, but it may be wise to offer it only to those who chronically pay late or have large dollar invoices. 

Before implementing, you should examine the cost versus the benefit.  Find out how much time your people spend on collections, especially from the customer you want to put on this program.  The cost of offering the discount should also be compared with the interest savings on your line of credit, making sure that what you would have paid in interest on the line is more than the discount given.

Stratifying Accounts Receivables

The balance in accounts receivables can be stratified to ensure that collection efforts are concentrated on the largest dollar amount account, which as a general rule make up the majority of receivables. In doing so, employees may be able to make only 10 phone calls on collections, instead of calling the entire list of past due customers.

Dunning Letters

In order to speed up the collection process, the dunning letter can be issued reminding customers of invoices that have become past due, and the amounts owed.  They should be sent out in a consistent interval from the time when payment was due, and every two weeks thereafter.  The severity of the letter increases as payment becomes further past due, culminating with a final letter (usually the third) which includes a statement saying the account will be turned over to a collection agency.  This can be an effective yet non-abrasive way of keeping the amount due in their attention.

Automatic Bankruptcy Notification

The loss of receivables due to bankruptcy can be mitigated or avoided all together by contracting with a credit rating agency who can fax you notification of any changes to the status of a customer’s credit rating which may lead to a decline in the customer’s ability to pay its bills. Having this information about a customer’s credit rating before they begin having trouble paying bills will signal when you should begin more aggressive collection procedures and reduce the credit limit you extend.  It could also save money on futile collection efforts and the total loss of the receivable after the customer has gone bankrupt.

With any luck, taking the time to implement a few of these strategies could lead to more cash in your pocket when you really need it.

10 Keys to a Healthy Business

This blog was coauthored by Andrea McManamon:

Andrea McManamon is a Manager in the Assurance Services Group with over fifteen years of experience in public accounting. Andrea’s experience comes from working with a wide variety of clients in various industries such as manufacturing, distribution, communications and not-for profit organizations.

Brent Thompson is a Vice President in the Tax Services Group. Brent and his wife Rachel have four daughters and enjoy cycling and hiking in CVNP.

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