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Collect From Slow-Paying Customers by Managing Accounts Receivable

Finance
Article
06/25/2015

Extending credit to customers is an important step when developing trusted business relationships. Customers may prefer using different payment methods and new businesses must strive to be service oriented and accommodating. Yet, when certain customers are routinely slow to pay — or don't pay at all — it helps to have an accounts receivable management plan in place.

Set up Multiple Payment Channels

Small businesses can improve their collection rate by finding ways to make bill payment easier for customers. Besides the standard cash and check, many retail businesses accept credit card payments. For business to business payments, offering some method of electronic funds transfer (EFT) is one way to simplify the process. Setting up an online payment form on a company website is another option to give customers flexibility.

Automate Billing Processes

Once a credit sale is finalized, companies should not delay the billing process. Automated invoice preparation using an online accounting system saves time and ensures that all bills are processed and flow through to the general ledger. E-mailed invoices reduce delivery time and paper usage, making them a preferred method of communication. To further increase automation of the billing process, an online accounting system's mobile capabilities allow invoices to be prepared and submitted from anywhere, further cutting the lag time between the time of the sale and billing.

Devise a Written Collection Policy

Once a sale is recorded in the accounts receivable register, companies should follow a plan for collection. Written procedures should be consistently applied to each customer. This avoids a situation where some customers are treated differently and perhaps allowed to bend the rules. Payment conventions often give customers thirty days to send in the amount owed, as many individuals and businesses pay bills on a monthly basis. If a bill remains outstanding after the thirty day repayment period, companies must proceed with alternate measures of collection. However, if a certain payment situation warrants special treatment, this should be documented in the customer's file.

Choosing Preferred Methods of Collection

Businesses transacting a large percentage of revenue through credit sales should generate and review an Aged Receivables report each month. Typically, accounts receivable are grouped in 30-day buckets and labeled as 30, 60, or 90 days past due. For each bucket, small business owners may use different collection methods. Letters and emails provide a paper or digital trail documenting early stage collection efforts, but they are viewed as impersonal and easy to ignore. Phone calls are a more personal approach, and may yield a better response or at least a starting point for negotiating a payment plan. The A/R aging report should also be reviewed for payment trends. If an overall slowing of A/R collections is noted, a company should think about adjusting their current practices.

Hiring Outside Assistance

Some companies choose to hire collection agencies or other external parties to assist with receivables management. Adding temporary collections staff can also improve A/R lag time when invoiced amounts outstanding grow beyond an acceptable amount. By removing company management from the collections process, they are able to focus on other day to day responsibilities of growing a business.

Balance Customer Relationships with Liquidity Needs

Successful accounts receivable management walks a fine line between providing superior service, flexible payment options for customers, and maintaining the cash flow and profit needed for a small company to thrive. Small companies may not be able to work through cash flow disruptions as well as larger, more established peers with a higher amount of liquidity. For this reason, accounts receivable management is vitally important for many young companies highly dependent on cash.

Reports such as "Aged Receivables," found in an online accounting system, provide small business owners with a clear picture of the amounts currently owed to them. Total outstanding invoices per customer can also be reviewed prior to making decisions on the best ways to collect on an individual account. 

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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