Accounts receivable management is essential to the financial health of a small business. All too often small business owners forego accounts receivable management, claiming that they are too busy with sales or day to day operations.
Everything is fine, they will say. We grew our sales by 50% this past year, and we have to focus on servicing our customers. If we keep them happy, they will pay us.
Famous last words. All the sales in the world mean nothing if they are only sales on paper, i.e, if you are not actually receiving money. I have seen too many business get into a cash bind because they were not paying attention to receivables.
Certainly happy customers are more likely to pay you than dissatisfied customers. However, I have built a business on collecting from people who have never disputed the product or service they received.
Design an accounts receivable program and stick to it.
Do you have an aging report? If not, you must get one immediately. An aging report shows you which customers owe you money, and how long each customer account has gone unpaid. It is likely that you already have the software to construct an aging report. If you do not, accounting software such as QuickBooks will do the trick.
Once you have your aging report in place, live with it. Review weekly and come up with a plan to contact delinquent customers. Bring in key staff and assign weekly tasks for follow up. I once had a client tell me that they were in such a cash bind that they were having trouble paying their bills. They began small group meetings every Friday that lasted only 30 minutes but reviewed delinquent customers, which steps had been taken, and what the next step should be. Just paying to attention and calling customers or sending them a collection letter made a dramatic difference.
We recommend, as a rule, a 90-day process for accounts receivable management:
After delivery of product or service – Customer service call to ask if customer happy service. Use the opportunity to confirm billing information.
- Thirty days – Friendly reminder letter or notice
- Forty five days – friendly reminder phone call
- Sixty days – Second letter. You can draft a completely different letter or simply send the first letter with a stamped, “Second Notice” on it. Be creative here. Use a different color paper, or a sticker in a bright color that lets them know they need to pay you.
- Seventy- five days – Phone call from management.
- Ninety days – Final notice to pay within ten days or be turned over for collection.
You may want to wait a little longer, say 120 days for some customers, especially if they represent repeat business to you. You may forego outside collection and take them to Small Claims Court yourself.
The specifics are not as important as having a process and having the discipline to stick with the plan. Consistency is key.
Even if you are lucky to have an accounts receivable department, do not sit back and assume everything is fine. Get involved. Lend support. Let the accounts receivable team know you are available to help when needed. Let them know they are a vital part of your company.
Accounts receivable management is not a spectator sport!