Accounts Receivable Collection

Accounts receivable collection becomes necessary when customers or clients do not pay their accounts when they fall due, and when they become overdue.

It would be nice if everyone paid their invoices on time ... but this is the real world.

  • Some customers are conscientious, others are not
  • Some are disorganized with paperwork
  • Some don’t have the money because they a) didn’t budget to pay your bill, or b) haven’t themselves been paid by their customers.

However, you need to get the ball rolling and start your accounts receivable collection procedures. Here is what this page covers:-

  • Contact with the customer and following up non-payments

  • Allowing the customer to pay the account off over several weeks / months

  • The formula for calculating interest

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Contact the Customer

Accounts Receivable Procedures

This is a five-step process for a worse case non-payment scenario.

  1. a phone call

  2. another phone call or two

  3. a letter of demand

  4. a final letter of demand

  5. hand over to debt collectors

Definition of debtor : A customer who owes money to your business

You could first send a copy of your overdue invoice stamped ‘This Invoice is Now Overdue’ and then wait it out, or you could...

... phone them for faster results:-

  1. 1st Contact:
    “Hello, this is [your name] calling from [your business], how are you?”

    “I’m calling about our invoice dated [the date] which is overdue and would like to know when we can expect to receive your payment?”.

    A calm voice from you will prevent the customer becoming defensive. Most people will be apologetic and let you know when they expect to pay. [A few might come up with some excuse as to why they are not going to pay it; you may end up having to take this dispute to the local courts.]

  2. If the customer gives you an expected date in the future, check on that date for their payment. If payment still doesn’t come through, ring them again (right away) and say something like:-

    2nd Contact:
    “Hello, this is [your name] calling from [your business].

    I’m calling about our invoice and the payment you said you’d make on [date] but it hasn’t come through yet. I am phoning to check if there is a problem? "

    They will most likely give you an explanation and another date/time frame. Check on that date and ring again.. let them know you are not going to forget about it. Let them know interest will start accruing now.

  3. If again the payment doesn’t come through, calculate and add the interest (scroll down for this procedure) and send them a letter along these lines:-

    1st Letter:
    "We refer to our Invoice No.[number] dated [date] and our various conversations regarding your payment.

    As your payment has not yet been received interest of ##% per year amounting to $### has been added to your account.

    We value your custom and would like this matter to be resolved as quickly as possible.

    Please pay your account within 7 days of the date of this letter to avoid further action."

  4. Wait one week, and send another letter if there is still no payment:-

    2nd Letter:

    We refer to our letter dated [date] regarding Invoice No.[invoice no.] dated [date].

    If we do not receive your payment within 7 days your account will be handed over to our debt collection agency.

    Please note that this action can affect your general credit rating, and you will be liable for the debt collection fees*".

    By now, your accounts receivable collection methods should have worked and the customer galvanized to pay. If they settle the invoice in full, but not the interest, you could simply reverse it because often it is not worth the headache trying to recover that small amount.

    See Accounts Receivable Procedures. Customers will only be liable for the debt collection fees if they have signed your Terms and Conditions which state they will be liable for these fees. This is why it is an important step to get customers to open an account. If not, the debt collection fees will come out of your own pocket.

  5. If they have still not paid, hand them over to your chosen collection agency so you can focus on the other important aspects of your business

Paying the Account Off

Your customer might ask if they can pay the account off over several weeks / months. If you are happy to do this then go ahead, but I recommend adding monthly interest because you are not a bank!

If they were to get a loan from their bank or any other place to pay your account they would be charged interest on the loan. Perhaps first suggest they try to get a loan from their bank before agreeing to let them pay it off.

Calculating Interest

Here is a standard formula:-

Average Daily Balance x Annual Percentage Rate

x Number of Days in Billing Cycle ÷ 365

  • Say the overdue amount is $500.00
  • The month you are calculating for is May = 31 days
  • Your late payment charge = 10% per annum
  • There are 365 days in a year

$500 x 0.10 = $50 x 31 = $1,550 ÷ by 365 = $4.25

So the interest is $4.25 for the month of May. Add this to the $500.00 and the customer’s total account due is $504.25.When the customer makes a payment apply it first to the interest, and then to the invoice amount.

Many people develop different methods for their accounts receivable collections (aka debt collecting) once they learn what works for them. It will all be swayed by how confident you are at performing this task. After a bit of practice you will find your groove... keep trying!

It is not my favourite job, but I do feel good when a customer pays because I called to remind them about it.

There is nothing wrong with outsourcing your regular accounts receivable collection task if you do not want to do it.

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Accounts Receivable Collection

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