While every business enjoys collecting income owed to them, some business owners I know do nothing when receivables become overdue. This is often just a simple case of not following up on aged debtor reporting or the fact that collecting overdue payments is a rather unpleasant task. Your accounts receivable is what’s owed to your business by your customers, and if you don’t monitor your accounts receivable report closely and stick to your collection policies, it can become hard to determine which payments are late and which will never arrive. An aged receivables report, generated by your accounting software, shows if customers are current debts (within the payment terms) or overdue and by how long and also the amount owed on each invoice. Most businesses have an accounts receivable policy that dictates when to bill, for how much and when to collect the debt. But some businesses that prioritise sales don’t always enforce those policies effectively. They extend credit and offer discounts to customers when they shouldn’t, and when it comes to collections, fail to follow up when payments are due. Carrying overdue accounts receivable has a cost. It creates cash flow uncertainty and rather than having free capital to invest in growth opportunities, buy new equipment or introduce new products, money is tied up on your balance sheet while you provide customers with free financing.
Accounting software keeps track of receivables by showing how many invoices have been sent, viewed and paid, and what still remains outstanding. When payments are received they must be applied to both the right customers and to the specific invoice they relate to. If this is not done correctly in the accounting program then follow-up on late payment becomes extremely difficult. You must make sure that your accounts receivable reports are up to date and that there aren’t any receipts to still be entered that need to be applied to customer accounts.
Collecting what’s owed
When following up on late payments, many customers may need a reminder or two before they get around to sending it. A good way of approaching this is to set a clear schedule. For example, a call on or just after the payment deadline, then a follow-up email within a week, followed by another call. The majority of your customers intend to pay, but they forget, are having cash flow problems or have misplaced the invoice. A friendly call, text, or email may be all they need. Ask how you can help them to be more consistent in making payments to you in future. Sometimes, the answer can be as simple as synchronising your invoice numbers or shifting a payment schedule to an earlier or later date in the month. If your customer has still not submitted payment after a reminder or two, something may be wrong. If it’s a new customer or one that’s often a problem, you may want to stop providing any further services until payment is received in full. If it’s a customer who has been around for a long time or is generally quick to pay, there may be an unusual circumstance you can help them with. Either way, you should get in contact with them. Remain friendly and professional, find out why they still have not paid you, and figure out how you can fix this problem together. After you’ve done this and they’re is still not paying but your invoice was received months ago, the information was correct, there are no unusual circumstances and the product or service was provided, it’s probably time to get a little more forceful with your collection efforts. At this point, the chances of you ever getting paid are diminishing, and it may be time to start thinking of turning things over to a collection agency, especially if what’s owed is a significant amount. But before doing this contact the customer and review with them all of the steps you’ve taken to collect this debt, and give them a final chance to pay with a short deadline. Tell them that if they do not pay by this date it will be turned over to a collections agency. If a company you’re dealing with seems to consistently pay late and doesn’t want to make an effort to change, it’s actually costing you money to keep them on. You should re-evaluate the relationship and drop them as a customer.
All businesses, whether they provide goods or services, need clear and concise policies for issuing credit and recovering debts. Terms of payment should be clear to all clients before you provide anything to them. Establishing these payment conditions allows you to be in control of this process and should form part of any formal contractual agreement you have with customers. To determine a payment schedule that works for you and your clients, consider industry standards as well as what your business needs to maintain steady cash flow. If you decide 14 days, for example, you should include that fact in your agreement.
Businesses should have a billing process that ensures accurate invoices are always sent on time. It’s very important not to make errors regarding units of measure, price or customer accounts data. Getting this wrong is more than just a data entry glitch as these seemingly insignificant invoice mistakes can lead to bigger problems. For instance, if you enter an incorrect address, invoices go to the wrong place and receivables slow down. Likewise, if your invoice indicates payment terms of 60 days, when it should be 30 days, you won’t be paid on time. Your invoice should be a clear and concise document that includes every piece of relevant data. It should include your company logo, the words ‘Tax Invoice’, have the issued date, invoice number, customer’s details, your address (and billing address if it’s different) and ABN. Amounts should have GST correctly displayed and whether it’s included or excluded in the total. The hours billed should be clear if you’re a service, or all the specifications of products if you sell goods. Also, payment terms and preferred payment methods should be included. The actual wording of the terms on your invoice is also important. Being polite and asking for payment within a certain number of days will probably get you paid faster than saying ‘due on receipt’ or ‘due immediately.’ Make sure the invoice includes all of the information your customers need to pay and provide multiple methods if you can for convenience such as EFT, Bpay or Credit Card. Being unambiguous avoids the need for follow-up questions which can delay payment. If there is a problem with the invoice, your customer is likely to just put it aside and deal with it later. Also, don’t switch between mailed and electronically sent invoices, as this can be confusing. But most importantly, the sooner the customer has a perfectly clear and accurate invoice, the sooner they can process it and you’ll get paid.