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.
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
Contact the Customer
This is a five-step process for a worse case non-payment scenario.
- a phone call
- another phone call or two
- a letter of demand
- a final letter of demand
- hand over to debt collectors
Definition of debtor :
A customer who owes money is called a debtor
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:-
- 1st Contact:
“Hello, this is [your name] calling from [your business], how are you?”
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.]
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:-
“Hello, this is [your name] calling from [your business].
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.
- 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:-
"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."
- Wait one week, and send another letter if there is still no payment:-
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*".
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
- 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
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!
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.
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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