Your business is unique based on your industry and the types of customers you serve. Therefore, your credit and collections procedures will also be unique to your company. In fact, we’ve found that most businesses should not treat every customer the same because every customer is NOT the same.
That’s why we recommend setting up customers into different credit classes – each with its own unique workflow and different steps in the collections process. For example, you don’t want to send a threatening collection letter to a well-established, strategic customer, but you probably should if you’re dealing with a newer account that is less established and has already broken several promises to pay you on time. Likewise, your government customers may tend to pay later than your commercial customers, so you may need a separate workflow to manage those accounts.
Your receivables management procedures and policies will vary greatly between customer classes. Below are some suggested business to business credit and collections procedures that you may want to consider for three types of customers – Strategic Accounts, Established Accounts, and New Accounts.
Keep in mind that for most businesses, strategic accounts represent less than 5% of their business customers, established accounts likely represent the largest portion of their customer base (upwards of 80%), and newer accounts make up the remaining base with the highest potential risk.
The first thing you want your collectors working on are invoice disputes, and they should start with the largest ones first. Any invoice that is in dispute means that you’re not getting paid until you resolve the dispute.
Segregate disputed invoices and use reason codes to understand why the invoice is in dispute. Is the customer claiming they already paid the bill? Are they disputing the information on the invoice – products or services billed, freight charges, missing purchase order information, sent to wrong person or address, incorrect product received, product damaged, etc. Isolate invoice disputes, set a policy for managing them, and track dispute reasons so you can implement new policies and procedures to prevent them from happening again.
The earlier you identify the dispute, the faster you can resolve the issue and the faster you’ll get paid. Credit and collections systems allow you to manage disputes, or you may want to manage these in a special list which is available for multiple members of your team – a hot issues list that requires team collaboration in order to resolve the issue before it escalates too far.
You should have a clear process for managing new customers. Do you require a credit application? How do you determine credit limits and credit terms? And who is responsible for contacting the new customer to explain your credit policies? Someone in your business should be responsible for maintaining your relationship with your customers – especially new and strategic customers.
You need to understand their internal procedures and who to contact when things go wrong. Some companies require proof of delivery before they pay. Others require that invoices be sent a week or two before they are processed for payment. Spend time in this area, and you’ll uncover dozens of areas where you can improve your processes while building healthy and mutually-beneficial relationships with your customers, which will improve customer retention, customer satisfaction, and potentially increased sales. After all, a bad credit experience is likely to drive away customers while a great credit experience will motivate them to do more business with you instead of your competition.
As mentioned previously in this series, you need to establish receivables management procedures and policies for managing large dollar invoices as these have the greatest risk and the greatest reward for your business. Understand who will manage the large invoices and when to start collection calls. We suggest that large dollar invoices be called much earlier in the process and more frequently to ensure that everything is correct, that the customer received the invoice on time, and the customer is willing and able to pay you.
You should remind customers to pay you a few days before the invoice is due and that there is still a balance due on their account. You may want to wait until the due date for strategic customers but you may want to remind newer customers 3-5 days before the invoice due date. Reminder emails take a lot of time if you don’t have the right system in place to automate this process.
Consider implementing a credit and collections system to assist in these communications or off-load the responsibility to an office manager, secretary, or other entry-level resource that has available time to send the reminders. Reminders should be friendly in nature and should reference the invoice or invoices with information about the balance due with instructions on how to make a payment. You should also resend the original invoice along with the reminder just in case they can’t locate the original invoice.
Past Due Emails
A past due invoice should be managed carefully. According to our research, you are likely to collect only 74% of invoices that age to three months; 30% of invoices that age to 6 months; and only 10% of invoices that age to 12 months. It is easy to send a past due notice to customers that have past due invoices. This email notification should be sent the day the invoice is past due, or within a few days of the invoice due date. It can be friendly in tone and like the reminder email, should include a copy of the invoice with the information the customer will need to remedy the situation
Your first collection call will occur within two weeks after the invoice due date. The call should be friendly in tone with the goal to understand why the invoice has not been paid. In most cases, you will find that there is a problem with the invoice or that the customer never received the invoice. You can then remedy the situation and set a follow-up to ensure that the customer has no valid reason to delay payment.
As the invoice ages you will need to adjust the tone of your communications with customers. Invoices that have aged beyond two weeks are becoming a serious risk. A collections email should be sent reminding the customer of the past due balance with a more serious tone than previous communications. The customer needs to understand that this is becoming a serious issue for your organization and that failure to remedy the situation will have negative consequences. Still, your communication does not need to be hostile and can still reinforce your commitment to working with them to resolve the issue.
To be continued…
In the second half of this blog we’ll tackle how to define receivables management procedures for:
- The second call
- Final Postal
- And third party collections
- sales notification
- third calls
- certified postal
- fourth calls
- third party collections
Don’t miss it, part two coming your way very soon!