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How to Handle an Outstanding Bill

Finance
Article
10/30/2014

Small businesses rely on a steady inflow of cash to fund operations. When a large outstanding bill remains uncollected for a long period of time, production can easily be disrupted. More complications arise when the outstanding debt is associated with a single, valued customer. Defining payment terms and collection policies to use as a guide will ensure that a business handles outstanding customer invoices in an efficient manner.

Identifying Outstanding Bills

Identifying and tracking outstanding bills is the first step to collecting amounts due. Accounting software makes the task easier with built-in reports illustrating outstanding invoices by customer and date at any given point in time. Management should review a weekly or monthly report of outstanding bills, also known as an aged accounts receivable report. Once a receivable is aged to a predetermined past due date, such as thirty days after invoicing, a reminder letter should be sent and follow-up procedures implemented.

Follow Documented Procedures

For many small business owners concerned about losing valuable customers, the tendency is often to let previously agreed-upon payment terms slide. Yet, a friendly reminder in the form of a phone call or letter may be all that is needed to collect on an outstanding bill. Invoices slip through the cracks in any organization and if this is a first-time occurrence, the customer's issue may be administrative, not difficulty making payments.

If a first reminder does not result in payment, companies should next follow a documented collections policy. The policy should begin with defining payment terms, such as all invoices are due on receipt. These payment terms should also be explicitly stated on every bill sent to a customer. If a contractual agreement is signed, payment terms should always be included.

Once it is understood that a customer is having difficulty paying an invoice, any decisions regarding the negotiation of payment terms should also be documented. If all customer payments come to a halt, management should consider stronger actions such as holding off on future sales, charging additional fees, or turning over the account to a collection agency. Legal action may also be required to recoup outstanding debt owed.

Bookkeeping Issues

When using the accrual method of accounting, adjustments are needed when some or all of a receivable is written off as uncollectable. Large companies with heavy sales volumes often estimate a percentage of their receivables to be uncollectable and set up an allowance in the financial statements at the time of billing. Smaller companies without an allowance will need to directly write off a bad debt using an adjusting entry. The basic entry decreases your amounts receivable, removing the invoice from amounts you expect to be paid and increases bad debt expense.

Other accounting concerns related to unpaid bills include recording late fees or penalty fees as revenue. If you place your customer on a payment plan, you will need to adjust the accounts receivable each month as payments come in. To give your customers an idea of how much they currently owe, it's a good idea to send out a list of unpaid invoices each month reflecting payment activity and how much is still owed.

Tracking customer billing can be a challenge for small companies, but online accounting systems can make this task easier by helping to automate the process and generate reports.

 

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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