A Guide to Accounts Receivable Collections
The objective of Accounts Receivable Collections is to collect your companies outstanding invoices as close to the due date as possible, with as little effort as possible, in as little time as possible, using as few resources as possible, without damaging your relationship with your customer or your salespeople.
It’s not hard to do, but it takes planning, good record keeping, a consistent and well-executed effort, thick skin, and a good attitude.
I’m assuming for the sake of this article that we already agree that it’s important to maximize cash flow and minimize bad debt losses, and we agree that to accomplish that someone has to monitor and collect late invoices, and finally that we want to accomplish all of that with as little friction as possible.
Assuming all of that, I’ve written this article to share my process for accomplishing that. It’s simple and effective and it always works, if you do it. I’ll cover;
- How and why to Use Your Aging to Manage Your Collection Process
- The Process
- Scheduling the work
- Initial Collection Calls
- Scheduling follow up
Use Your Aging to Manage Your Accounts Receivable Collections Process – How & Why
What is an aging anyway?
“An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos by date ranges. The aging report is the primary tool used by collections personnel to determine which invoices are overdue for payment.” https://www.accountingtools.com/articles/what-is-accounts-receivable-aging.html
I couldn’t have said it better myself – your aging lists all of your open invoices by customer and age. Current invoices in the 1st column then 30-day invoices, then 60-day, the next column will have the over 90-day invoices, and sometime you’ll have one more column with everything 120 days and more.
You’ll generate your aging from your accounting software. Back in the day, we’d do this by hand, and in the company I worked for, it took the better part of 3 full days; – but now you can have an updated aging within about 30 seconds.
There are too many programs out there for me to tell you exactly how to do this but generally speaking start from the reports menu and go from there.
I can however, speak to the reports in Quick Books. I find the Open Invoices report to be more useful than the collections report, it’s organized by customer which is much easier to use. You’ll want to see everything a given customer owes in one place before you make a call or send an email.
Why use the aging?
Your aging will tell you everything you need to know to effectively manage your accounts receivable collections process and collect your late invoices, including;
- Who has a late invoice(s), with any luck it will include contact information, but most don’t.
- Invoice information, including;
- invoice numbers
- invoice dates
- invoice amounts
- The total outstanding for each customer
- The total outstanding in each aging column
It’s the starting place for your entire collection plan and provide all the information you need to get the job done. There is no other document that I’m aware of that tells you more succinctly who is late and how late they are and what they’re late on. That’s the information you need for this process.
So we don’t need to turn this into a discussion – use the aging. It’s more accurate than your memory and faster than your filing cabinet – even an electronic one.
How to Use Your Aging
I’m sharing my process. I’m not claiming this is the best or the only way. I am claiming to have done it this way for 30 years with adjustments for technology and experience, in over 40 different industries. It has never failed me, it always works and it’s easy, tedious but easy. So here we go …
Deciding Who to Call
You should have previously decided and documented in your credit policy when to begin contacting late customers. Let’s assume, again for the sake of this article that you’ve decided any customer with an invoice more than 10 days beyond terms is late.
Your objective is to contact every customer with a late invoice, to find out if they have the invoice and when they plan to pay it.
Then document what they say, ideally in a searchable CRM as opposed to Outlook, your accounting software, or making notes on the aging. Your intent is to track the invoice until it is in fact, paid.
- Start at the beginning of the aging and work your way from start to finish contacting every customer with a late invoice.
- Mark the aging in the left margin to note that you’ve made contact, a simple dash or check mark will work. (I’ll get into the purpose of this step later.)
- Contact accounts payable. Send an email or make a call, whichever seems more appropriate.
- Record the results of your call in your CRM (customer relationship management software).
- Schedule a follow up.
Now, that may seem too obvious, or perhaps too tedious to even write down, but leave out a couple of those steps and you’ll find you’ll never get the job finished and cash flow is likely to suffer.
When to Make Contact
It’s difficult really to separate when and who, you decide who to call based on how late they are and if you have a lot of customers how large the invoices are.
The temptation will be to contact only the 20% of your customers that have the highest value invoices. This is a mistake. You’ve probably been in contact with these customers all along and may have even given many of them special terms. It’s the other 80% you need to work into the mix.
Large agings require some planning.
Again the objective is to contact everyone with a past due balance, every month as many times as it takes to collect the past due balance, without ticking them off. To work through an entire aging you can start at the beginning and work to the end. If it takes more than a full day to work
through the whole aging, and it generally will, on the 2nd day begin where you left off the first day, not at the beginning.
If it is too big to get through in two weeks divide it in ½ and assign the 1st
½ to one collector and the 2nd 1/2 to another. It could take several weeks to work through the entire thing so here are a couple of alternate strategies.
Start at the beginning and look for customers with late invoices that are over X number of dollars and contact them first – then go back to the beginning and work your way through the rest. You have to decide in advance what X is, I generally look for very large first, over $5k, then I go back to those over $1000, then the rest.
If I’m working a large aging I’ll generally wait to collect balance under $100 until they hit 90 days, hoping the customer will take care of it before I get to it, and often they do.
You’ll need to print a new aging at least once a month. If you have to use a new one before you’ve gotten to everyone don’t start at the beginning again. Start where you left off, or start at the end and go back to front.
What not to do
Here are a couple of things you should not do. Don’t:
- Call only the customers with high past due balances
- Call only the customers you like to talk to
- Call only the customers that irritate you
I think you see where I’m headed here, contact everyone with a late invoice. I generally wait on balances under $100 until they hit 90 days, or until a larger invoice goes beyond terms, but I wouldn’t put it off longer than that. Don’t;
- Spend hours analyzing and marking the aging without making calls or sending an email.
I mention this because over the years, virtually every person I’ve hired for accounts receivable collections, has wanted to do this. After I explain how to mark an aging they want to sit down and check off each one they plan to call then go back to do the calls, it sounds like it makes sense but it’s usually a waste of time. Just get started.
The purpose of “marking the aging is to save you time later, so you don’t have to double check to see if you’ve contacted a particular contact. If it’s marked on your aging it should mean you’ve contacted the customer and scheduled a follow up.
Deciding How To Make Contact
When I first started doing accounts receivable collections back in 1985 (you’ve read my backstory, right?), there was one way to contact a past-due customer, and that was with a call. We could mail statements and dunning letters, but there were no fax machines, and there was no email. No cell phones, SMS, or texting.
I’ve got to be honest with you, I still prefer the phone over everything else, BUT I can’t deny the efficacy of email. And in truth, it’s more courteous than a phone call, especially on a first contact. It gives the person in accounts payable the opportunity to respond to you when it’s convenient for them, rather than being interrupted by a phone call and having to drop what they’re doing. We all hate that, right?
So, I’ll usually start with an email, using this format (one of these days I’ll learn how to do a screen-shot and put it in here but for now I’ve tried like a dozen times – this will be easier to read anyway. So, this is how mine would look.
Cash In USA – Open Invoice Inquiry
Please provide payment status on the attached unpaid invoice(s). I can be reached at 800-700-7719 x110, or reply to this email.
Cash In USA
Some Do’s and Dont’s
- Do include your phone number with an extension.
- Do include a copy of the invoice.
- Do keep it friendly.
- Do use non-confrontation language such as “unpaid” instead of “late”.
- Don’t make it hard to contact you.
- Don’t send statements over and over.
- Don’t be stern or defensive or accusatory.
Depending on the industry you’re in, give your customer no less than a full day to respond and no more than a week. At least two days is probably better, and I usually wait at least 3 or 4, then send the same email but start the subject line with “2nd Request – “.
This second email will get a response from 80% of your customers, and the rest you’ll need to call.
If you get significantly different results, like less than 60% responding to your second request, you probably have something else going on, and you need to do some research. You can start by reading my article on “Red Flags and Warning Signs.”
Scheduling Follow up
After you send your first email, you need to document what you sent and schedule a follow-up. These two steps are key to the success of your accounts receivable collections project! Don’t skip them.
If you’re using a CRM like ACT or Hubspot, you’ll send the email from within the program, and the program automatically records it. So you’ll see what you sent, when and to whom.
You’ll still have to schedule the follow-up. Appropriate scheduling of both your initial call and your follow up calls is key to your effectiveness, and success with this accounts receivable collections system.
I can’t say you would be completely wasting your time if you don’t do it but …
The Initial Call
When to schedule and make the initial call is an important decision and should be considered carefully. This decision will impact both your cash flow and your relationship with your customer. It’s important that you not be experienced as either a bully or a pushover.
Schedule your initial call no less than 3 days, and no more than 7 days, after your second request email.
Scheduling Follow-Up Calls
Unless you’ve received a credit-card payment or check by phone during your initial call you must schedule a follow up call. The follow-up call, as we’ve mentioned before is critical to your success. Here are some guidelines.
- Give your customer the courtesy of a reasonable amount of time to respond. In these over-scheduled times, I recommend not less than two days and not more than seven days.
- Try what I call “Perfect World Scheduling.” Schedule each call as if making that call was the only thing in the world you had to do.
- Do not schedule based on when you think you’ll have time to make the call, around your off days, or around your vacation time. Schedule it for the day and time it should be done and would be done if you had nothing else to do.
This article has gotten a bit wordy so I’m going to wrap it up here but in another article(s) I’ll cover;
- More on scheduling
- What to say when you reach your contact
- What to do when you don’t reach your contact
- Recording Results
- Collection Tips and Techniques
- Dealing with problem customers
- More Do’s and Dont’s