The complex psychology of invoicing also dictates that you would be smart to exhibit certain element of grace, according to Mitch Solway, the vice president of sales and marketing at online bookkeeping and invoicing company FreshBooks, which has recently studied its customers best practices in accounts receivable.
"One of the best pieces of advice we've uncovered in recent months is to think carefully about the actual wording on the terms you apply on your invoices," Solway says. "Being polite and asking for payment within 21 days seems to get our customers paid a lot faster than terms such as 'due on receipt' or 'due immediately."
In other words, treating customers in a human way can actually create good-will and speed up payment.
Dig Deeper: Collections in a Tough Economy
Setting Up Accounts Receivable: Drafting a Collections Policy
Even for businesses with all the best accounts receivable practices in place, some clients never seem to keep up with payments. In general, you want to give these late payers the benefit of the doubt – but you also need to stay true to your business's bottom line. Setting up a clear collections policy at the outset of establishing an accounts receivable system is the best way to lay a groundwork for collecting overdue amounts.
Amenta suggests being kind but not meek in the process – after all, your clients should know what to expect if you've already laid out their payment process at your relationship's outset. "It's definitely necessary to have a follow-up plan for overdues," she says. "Is it going to be a phone call? Is it going to be a series of emails or a hand-written note?"
You'll want to be establishing a timeline of steps to take on collecting – say, first a call, then a note a week later, then a call daily until your debtor has established with you his or her ability to pay.
Consider how much flexibility you can offer to a client in a dire situation. Amenta suggests allowing good clients an opportunity to establish a payment plan. But if you're in real doubt over whether a client has the ability to pay, after you've given them an extended payment window, it's okay to ask for assurance. Asking for references who have found the client reliable even in tough financial times is one option; another is asking for past balance sheets so you can analyze whether there's a seasonal cash flow issue for the company.
If you're anticipating some collections will present real trouble for your business in the future, take some time early on to research your state's collections laws, so that you will know what your steps must be before taking a seriously overdue debtor to small claims court. For information and commercial lawyer referrals, check out the Commercial Bar Directory.
Dig Deeper: How Much are You Actually Lending Your Customers?
Setting Up Accounts Receivable: Knowing When To Enlist Outside Help
From the beginning to the end of establishing a quality accounts receivable system, there are some circumstances under which you might want to employ a bit of assistance.
1. System Set-up. While most experts agree that you, as a small business owner, need to keep your eyes on the bookkeeping at all times, it is often wise to bring in outside help when you're implementing a new software system.
2. Establishing Credit for Customers. If large clients do not want to pay at the outset of a service or transaction, or in a proscribed period thereafter, you'll want to enlist a Credit Bureau service or credit-rating agency to review the credit of customers, so they can get a green light to spend with you—and you can have peace of mind in serving them. The fee is typically $1,000 per every 100 credit checks. If you're working with an number of high-cost new clients, working with a credit agency can be worthwhile to avoid trouble.
3. Collecting Overdue Accounts. After you've implemented your collection plan, including multiple conversations with the client who isn't paying up, you might feel like giving up. Enlisting a collections agency is another smart option. If it seems like the step could offend a customer, just think: would you rather take them to court?
Dig Deeper: Dealing with Missed Payments
Setting Up Accounts Receivable: Additional Resources
For managing collections, check out this list of collections laws and how they vary by state.
With a variety of training and professional development programs for people working in accounts receivable, the non-profit group International Accounts Receivable Professionals can be a great training resource.
If you're just getting started and find yourself unfamiliar with some of the terminology involved in accounts receivable, check out this thorough online glossary.
The Financial Managers Society is another professional organization where you can look for advice, tools and guidance.
You can check out form templates at the site of the International Accounts Payable Professionals.
Dig Deeper: Managing Your Receivables
