Overdue accounts finance your customers’ businesses with, typically, an interest-free or low-interest facility. Particularly in this high-interest environment, your customers seek the cheapest and easiest ways to obtain financing and stay in business. That often means delaying payment to creditors like you and diverting money towards their payroll or other costs. But what about your financing needs? Instead of financing your customers, fund your operations by avoiding or reducing overdue accounts.
In a nutshell, improve the processes you have in place to collect overdue accounts. There is no one-size-fits-all or magic bullet. Instead, tailor your actions depending on the customer, the amounts involved, and other factors. For instance, recognize that strategies can escalate from the mild (gentle or friendly reminders to pay) to the extreme (collections agencies, litigation, petitioning a customer into bankruptcy). The more extreme measures will likely result in the loss of that customer forever, whereas milder measures may not.
For these reasons, know your customers and stratify your overdue balances. If you have repeat customers, get to know them. Know which ones may pay a little late and just need a reminder versus those requiring more extreme measures. Know which customers have had a change in financial controller or other key people that could hold up your payments. Make a courtesy call and build a rapport with the new person to encourage favourable payment attitudes towards your accounts.
Stratification means dividing delinquent accounts into buckets based on shared characteristics and tailoring collections strategy to each bucket. Stratification creates efficiencies.
For instance, isolate your high-value invoices or customers into one bucket and devote more time, hands-on attention, and resources to that bucket. This bucket will likely generate better returns on investment of collection efforts because of its total dollar value. These accounts may warrant a phone call from your best collections person or a manager or an in-person visit to collect or encourage payment. (Remember to aggressively promote electronic funds transfer to avoid having to pick up cheques. See SPP FN 5.11 – Electronic Funds Transfer). These may also be the accounts that warrant more expensive strategies, like a lawyer’s demand for payment letter for extended delinquencies.
Sometimes, a combination of knowing your client and stratification work together to inform the ideal response to some collections conundrums. One such issue is whether to remind customers of upcoming due dates to avoid late payments. On the one hand, this is a proactive step to reduce or prevent overdue accounts. But on the other hand, customers may be annoyed or even offended and protest loudly. Some customers equate these types of reminders with premature hounding.
A possible solution lies in your knowledge of customers and their account size. One approach is to not routinely remind customers unless they are habitual late payers or have a pattern of paying late because they need reminders (for instance, they may have explained that payments were late because they were overlooked). Or, instead of an intrusive phone call, send a tactful, more generically worded “we-routinely-send-reminders-to-customers” type of email. Alternatively, you may prefer to make contact only after payment is a day or two late.
However, you may decide to call a customer with a substantial balance owing before the due date if you are critically depending on getting paid to satisfy your own deadlines or requirements.
Invest in robust collections staffing and procedures. Organize processes, including written policies, scripts for collections calls, and training and supervision of collections clerks. Clarify departmental responsibilities and set collections targets. Dedicate staffing to collections for increased efficiencies instead of diluting their focus with other assignments. Your investment will vary depending on the volume and value of accounts receivable and delinquencies and how essential it is to collect on time.
A few other tips may help you to avoid or reduce overdue accounts:
- Accept partial payments. Don’t let disputes about portions of an account hold up 100% of your inflows. Allow the customer to pay the undisputed amount while you work together to resolve the disagreement. Put in writing for clarity and evidence that accepting partial payment is not a concession on the unpaid balance, which remains outstanding until you and the customer agree otherwise.
- Escalate non-payment issues to the customer’s senior management team. If multiple efforts to collect have failed and the overdue balance is significant, it may be time to go above accounts payable and contact the CEO or other senior person. Involving senior management could result in faster payment.
- Impose a credit hold while you resolve non-payment issues, if necessary. Under a credit hold, the customer gets no further credit until they settle overdue accounts. Customers may be more inclined to pay to regain access to credit for the goods and services they need. Remember to communicate credit holds to sales, shipping, and other departments that need to enforce the hold.
Meeting your duty of care
Above are just a few of the strategies that could reduce the extent to which you finance your customers’ businesses at the expense of yours. First Reference’s PolicyPro databases include numerous other tactics. Log in to the Finance and Accounting database in PolicyPro, which includes FN 1.08 – Overdue Accounts and Bad Debts and countless other policies and tools to help you.
Policies and procedures are essential, but the work required to create and maintain them can seem daunting. The Finance and Accounting, Operations and Marketing, Not-for-Profit, and Information Technology databases in PolicyPro, co-marketed by First Reference and Chartered Professional Accountants Canada (CPA Canada), contain sample policies, procedures, checklists and other tools, plus authoritative commentary to save you time and effort in establishing and updating your internal controls and policies. Not a subscriber? Request free 30–day trials of Finance and Accounting, Not-for-Profit, Operations and Marketing, and Information Technology databases in PolicyPro here.
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