Receivables Management Policies and Procedures

In the first half of this blog, we discussed defining procedures for receivables management disputes, reminder emails, large invoices, and more to help you become more consistent and effective in your communications with customers. This blog will build upon what you have already learned and cover a few more important policies and procedures every AR management department should have in place and why they are important.

Second Calls

A second receivables management phone call should be made within the first 3-4 weeks after the invoice due date. At this point in time the customer should have received three emails – a reminder, a past due notice, and a collections email as well as a first phone call. The second phone call acts as a follow-up on the collections email providing the collector with an opportunity to address the problem directly with the customer. Again, the tone of the communication can be friendly but should convey to the customer that the issue is serious and needs to be rectified to avoid future consequences for non-payment.

Sales Notification

You may need to involve the sales department if invoices continue to go unpaid. We suggest notifying the customer’s sales rep of the issue when the invoice is 3-4 weeks past due. Consider that the sales rep probably has the best relationship with the customer and they likely have a financial incentive to resolve the issue so they can get their commission on the initial sale and they can continue to sell more to the customer in the future. The sales rep should be in contact with your customers more than your credit and collections team and can act as a resource to resolve more serious invoice disputes since they may have more information about the products or services provided to the customer on the initial order.

Third Calls

A third collection call should be made about 30 days after the invoice due date. At this point in time the account is seriously past due and the customer is facing much more severe consequences for non-payment. The call can be friendly in nature but should convey a much more serious tone with more details about consequences and timelines, should the issue continue to go unresolved. Consequences may include putting the customer account on hold, ceasing all product shipments or services, and possibly more severe actions such as reporting the customer to credit bureaus, turning accounts over to third party collections, or legal actions.

Certified Postal

By now the situation has become very serious, and there is a high probability that you will be faced with difficult decisions to take legal action or to terminate a customer account. The issue should now be escalated to a senior level executive with authority to work with the customer on a payment plan or to rectify more severe invoice disputes.

The next step in the  receivables management process should involve the creation of a letter from your executive team to the primary contact’s immediate supervisor, CFO, Controller, or President, highlighting what has been done to remedy the situation and the serious nature of the issue at hand. This letter should be sent when the invoice is 30-40 days past due via certified mail with a corresponding email copy sent to all of the contacts where email addresses are available.

Fourth Calls

The fourth, and final phone call will be made by a senior level executive around 40 to 50 days past due. It is provided to give the customer one last chance to make a payment. At this point you should ask directly for a wire transfer, ACH bank transaction, or credit card to rectify the situation. Failure to pay in the next 5 days will result in the account being turned over to third party collections, a report filed with credit bureaus, and possible legal action. There is no friendly tone in this communication. The issue will be handled professionally but it is a serious matter with serious consequences.

Final Postal

You may want to send a second letter via certified mail and another email to all customer contacts when the invoice is 40-50 days past due. This will be the final communication with the customer notifying them that you will be seeking legal action and turning their account over to collections if payment is not received in 5 days.

Third Party Collections

You’ve emailed the customer 5 times and you’ve called them 4 times. The issue is still unresolved and you now pursue the only options left to resolve the issue. Depending on the size of the invoice, you may want to turn the account over to a professional, third party collections firm, sell off the invoice to a factoring company to recoup a small portion of the balance due; or seek legal action which will be costly and time consuming. Final actions should occur between 45-60 days past due as a last resort, understanding that it is unlikely that you will ever do business with this customer again.

The table below provides a suggested timeline for credit and collections actions for each of the three primary types of customer accounts – strategic, established, and new customers, as explained previously. The table is organized in sequential order as the invoice ages. Large disputes and large and medium invoice definitions will vary by company. The numeric values under each type of customer represent the number of days from the invoice due date that the action should occur, assuming Net30 terms. Some actions such as identifying invoice problems and sending reminders will occur before the invoice due date (represented by a negative numeric value).

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Summary

The receivables managment procedures outlined in both the first and second part of this article represent suggested strategies for communications with customers to resolve non-payment on past due invoices. You may need to adjust the timeframes for each action for various customers, and you should always do the right the thing to protect your customer relationships where it makes sense. As mentioned previously, most customers want to pay you on time and there are valid reasons why they don’t. Less than 1% of your customers should ever reach the final collections stages where you need to send them to third party collections or seek legal action. Utilize the email templates, letter templates, and sample phone call scripts included in the appendices at the end of this document as a guide for managing your collections process, but make these documents your own, as you know your customers best, and almost every company will need to make adjustments to these documents before using them in their business.

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