In order to stay competitive, many business owners find it necessary to extend credit to customers. However, if you offer later payment options, it is crucial that you have a well-developed and communicated accounts receivable system.
Here we have listed a few elements of a successful A/R management plan, and how to implement them in your business.
Communication. It’s said to be the key to a good relationship, and that can apply to business relationships as well as personal ones. Communicating well is key to managing receivables accounts. Let’s look at the who, what, when, and how, of A/R communications.
Who? This seems obvious, enough…the customer, right? But, in reality, it’s not just the customer with whom you are communicating. Assuming you’re not a 1-person operation, you need to be in good communication with your employees or co-workers regarding what promises and agreements have been made with the customer. If you contact a customer on Tuesday afternoon regarding a past due invoice, and they just told your partner that morning that the check is in the mail, your entire company looks disorganized and unprofessional.
What? When alerting a customer to a past due payment, simply informing them of the amount owed is not the best option. Providing a detailed statement, possibly with an itemized duplicate of the referenced invoice, is far more helpful. Important information to include is the amount owed, days past due, what services were rendered, options for remitting payment, and contact information for questions regarding the account.
When? Generally, you would expect to increase contact as balances get further past due. A gentle reminder the day after the due date if payment has not yet been received is appropriate, with missives gradually becoming more frequent and insistent as the invoice gets to 15 days past due, 30 days past due, etc. (However, it would be best to avoid multiple communications a day, as that could constitute harassment.)
How? “The medium is the message”. For an account that is just barely overdue, a mailed or emailed statement (as described above) might be enough of a reminder. If more time passes without payment or a response from the customer, a more direct phone call is in order. This leads us to our next element of a successful accounts receivable management system…
Delegation. To maintain a good working relationship with the customer, it is ideal if you can separate the less pleasant side of that relationship, collections, from the more positive side, which is the work and value you provide to the client.
Delineating separate avenues of communication between the service and payment sides of your business can help you achieve your A/R management goals without damaging the rapport you have built with your client. Large companies have entire Accounts Receivable departments, but small businesses rarely have that option.
However, if you have more than one employee, someone other than the client’s primary contact could act as the accounts receivable delegate. If you’re the sole employee, you can even do something as simple as set up a separate email. (For instance, if your email is “[email protected]”, you could set up an email called “[email protected]”.)
The key is to avoid marring interactions with the customer which could lead to continued or future work by derailing the conversation into payment discussion.
Documentation. Good documentation can prevent so many problems in every area of business, but especially in accounts receivable. Before a single customer is invoiced, your A/R plan should be formulated and written down so everyone in your business knows exactly what the payment terms are, who is responsible for contacting customers, what to do in case of a dispute, etc.
Payment terms should be made clear to the customer before services are rendered, and should then be reiterated on the invoice. If a balance does become overdue, remind customers of the payment terms, and document every communication with the customer regarding the overdue balance. Reference previous conversations about the account in new discussions about them. Established fact is far more effective in encouraging remittance than strong emotions or harsh words.
What should you do with a customer who isn’t paying?
If the customer hasn’t gone ghost on you (in other words, if they are still maintaining some form of contact with you), and would like to continue purchasing goods or services from you, do not cut them off. Cutting them off completely is a great way to ensure that they will do no further business from you, and will not pay you the money already owed.
However, do not provide any further service on credit. Request pre-payment for any further work you perform, then apply that payment to their outstanding balance. This allows you to maintain a working relationship with the customer and recoup the money you are owed.