The accountant is usually in charge of granting credit to customers, as well as collecting funds from them. These basic responsibilities give rise to a number of fundamental credit management tasks. One among the credit management task, collection is found to be the hardest area, and collecting overdue payments is the hardest of the hard part, when we are still in the frame of in-house collection. There are a multitude of methods for collecting payments from customers. In this post, we progress from several milder contact methods into significantly more aggressive collections tactics.
Most collections departments do not start contacting customers until a number of days after an invoice due date, either on the assumption that the Postal Service takes a mighty long time to make deliveries or that a customer’s payment process may be interfering with timely payment. Whatever the reason, customers with an interest in delaying payment have an almost guaranteed extra week before a collections person even begins to think about contacting them.
Instead, begin calling immediately after the invoice due date has passed. If the invoice is due in 30 days, this means contacting the customer after 31 days. Though some checks will indeed be in the mail at this time, rendering some calls unnecessary, the vast majority of calls made will be to companies who have not paid. By taking this approach, the company instills in its customers the idea that payment terms are to be taken seriously, and the company absolutely expects payment on the stated date.
Seven Steps To Conduct Collections Review
This procedure is used by the accounts receivable clerk to manage the collections process. Here are the seven steps to take:
Step 1. Print Accounts Receivable Aging
Go to the accounting software and access the ACCOUNTS RECEIVABLE screen. Print the accounts receivable aging, making sure that the aging date buckets are set at 10, 30, and 60 days. This bucket configuration will separate out all invoices that are 40 days old and older, which is the primary grouping of invoices that require collections activity.
Step 2. Distribute Accounts Receivable Aging to Sales Staff
(1). Access the Accounts Receivable Aging Report (ARA Report). Using the field selection function, list the salesperson name for each invoice in the report.
(2). Export the file to an Excel electronic spreadsheet.
(3). Sort the ARA Report by salesperson, and then extract each salesperson’s report section to a different spreadsheet. Save each spreadsheet using the name of the targeted salesperson.
(4). E-mail each spreadsheet to the targeted salesperson, with an attached note regarding any collection problems.
Step 3. Highlight Receivable Problems
(1). Review the ARA Report and identify all large invoices that will be due for payment within the next days. Issue payment notification letters and copies of the invoices to these customers. Note on the ARA Report the dates on which letters were sent.
(2). Review the ARA Report and circle or highlight all invoices that are more than 40 days old. These are the invoices requiring collection activity.
(3). Compare the Cash Receipts Journal to the ARA Report, looking for any customers who skip large payments, only paying smaller invoices instead. Make note of this issue in the customer file, and also forward the information to the credit manager.
(4). Compare the Discounts Taken Report to the ARA Report, looking for any customers who have stopped taking early payment discounts. Make note of this issue in the customer file, and also forward the information to the credit manager.
Step 4. Contact Customers
(1). Stratify the customers listed on the ARA Report in declining order by total dollars overdue, using a different color highlighter to note those customers requiring the most immediate attention.
(2). Print the Customer Contact Report, which contains a list of all customers, their main accounts payable contacts, e-mail addresses, phone numbers, and fax numbers. Using this information, note on the ARA Report the states in which customers are located, so calls can be placed at the correct time within the time zone of each customer.
(3). Use the Customer Contact Report and the stratified version of the ARA Report to contact customers and determine why payment has not been made. If a customer states that a payment is being processed or is in the mail, verify exactly which invoices are being paid and additionally inquire about any overdue invoices not included in the incoming payment.
Step 5. Maintain Contact Log
Go to the customer contact log book and write down in it, for each customer, the date of contact, who was contacted, and what information was gained. Use this information as a reference whenever calling the customer again in the future. Also if there is new customer contact information as a result of the day’s calls, update the “Customer Master Report” with this information.
Step 6. Review Accounts with Credit Department
If, as a result of the day’s phone calls, it is necessary to alter a customer’s credit status to more properly reflect his or her ability to pay, then go to the credit department and review the customer’s credit situation with the credit manager. If new credit terms are decided upon, contact the customer to let him or her know about the revised situation.
Step 7. Select Collection Tactics
Based on the customer’s payment history, the status of its latest credit report, on-site visits (if any), and the size of overdue invoices, select a mix of collection tactics from the following list, which is sorted in increasing order of severity:
- Stamp a reminder notice on late invoices
- Send invoice by certified mail
- Issue dunning letters
- Issue dunning letters by e-mail
- Issue dunning letters to managers outside the accounts payable staff
- Issue attorney letters
- Call on a regular basis
- Visit the customer
- Have a senior manager contact a counterpart at the customer
- Accept a merchandise return
- Set up a periodic payment schedule
- Convert a receivable into a promissory note
- Send a completed small claims court complaint form
- Sue customer in small claims court
- File an involuntary bankruptcy petition for the customer
The best way to collect small overdue balances is to restrict collections activities to the use of dunning letters. This is the least expensive way to contact customers, and is to be preferred over more labor-intensive activities such as direct personal contact or phone calls. Though only one collections method is advised in this situation, one can certainly mix up the methods and timing of delivery in order to gain the customer’s attention. Instead of the traditional mailing, try sending the letter by fax or e-mail, and distribute it to different people within the customer’s organization in hopes of jarring loose a response. An easy technological twist to this method is to send the dunning letters by e-mail. Not only is transmission instantaneous, but recipients also tending to forward the messages straight to the party who is best able to handle payment. Further, an e-mail response is likely for a high percentage of these issuances, especially when dunning messages are custom-written. A series of dunning letters may not force a delinquent customer into paying for an overdue invoice.
The next step should be to issue an attorney letter. This is a letter issued on an attorney’s letterhead and supposedly written by the attorney, threatening legal action if payment is not made. The implication is that the customer is now much closer to a lawsuit, which sometimes brings about a rapid settlement of the outstanding balance. Attorney letters are expensive if custom-written by the attorney. To reduce the cost, write the letter for the attorney and just ask him to print it on his letterhead. To further reduce costs, state in the letter that all customer responses be made back to the company, not the attorney. This has the double purpose of keeping the attorney from being buried by phone calls and keeping down billed hours.
Customers do not normally like to pay for an invoice until all disputes related to it have been resolved; thereby allowing them to pay the full amount, staple the remittance advice to the complete packet of resolution documentation, and file it away. This approach is also used by customers not willing to pay at all; they create a dispute over a small item and refuse payment on the entire invoice, resulting in very long waits for payment. The solution is to insist on payment of undisputed balances right away. This is especially appropriate on multiline invoices where only a few items are being debated. If a customer has a history of withholding payment based on a disputed item, act quickly and insist on immediate payment of the undisputed balance until the customer figures out that this ploy will no longer work.
Customers like to promise payment by a certain date, wait for the date to pass, and then dispute the details of their promise with the collections staff. Even if a collector has properly documented the last customer contact, the customer can get into the ‘‘he said, she said’’ game and claim that the collector did not write down the details correctly. Besides being frustrating, this game also delays payment.
The best solution is to write down the promised payment information in a letter or e-mail and send it to the customer. This confirmation approach ensures that customers see the collector’s version of the earlier conversation as soon as possible, and have an opportunity to dispute it at that time.
By the time the promised payment date arrives, the customer should have few excuses left for not paying. If a customer has agreed to a repetitive series of payments, use this approach to both thank him for the most recent payment and remind him of the amount and due date of the next payment. Though this may call for the issuance of quite a few letters, customers will be very aware that the company is keeping a close eye on the arrival dates of their payments. There are a few cases where a shipped product is still on hand and untouched by the customer, making it possible to accept a merchandise return.
This possibility exists in seasonal businesses, where customers may not have been able to sell off all their goods during the peak season, and now have no way to clear out their inventories. Another possibility is to review the latest customer financial statements and see if its inventory turnover is very slow; if so, the customer’s overstocking practices may mean that the company’s goods are still untouched in the customer’s warehouse. Even if a customer has used up most of the company’s goods, there may still be a few units on hand that can be sent back in partial settlement of the outstanding debt.
When a customer does not pay the balance of an overdue invoice, one option is to shift it over to cash-on-delivery (COD) payment terms. If the customer has no other source for goods and so must buy from the company, add the entire open balance or a portion of it to the COD amount, thereby enforcing payment if the customer ever wants to see any additional goods delivered.
A common approach when no other collections method works is to shift selected invoices to a collections agency for more aggressive follow-up. In exchange, the agency requires a percentage of each collected invoice (typically one-third) as payment for its services. Despite the common perception that collections agencies only go after larger outstanding invoices, a few specialize in the more difficult types of collections, such as discounts for pricing discrepancies, damaged goods, promotional allowances, quality problems, quantity-delivered variances, unearned cash discounts, and the like. Though collections agencies charge high fees for these specialized services to compensate them for the extra effort required, this may still be better than a complete write-off of the deductions.
Procedure To Resolve Collection Issues
This procedure is used by the collections clerk to determine the causes of collection problems and find solutions to them.
Responsibilities: Collections Clerk
Step-1. Summarize Collection Issues
1. Contact the customer regarding why it has not paid each invoice on time. Note the reasons in the collections contact log.
2. Based on the previous history of reasons given by the customer, ascertain if there is a correctable internal problem causing the collection issue, or if the problem lies with the customer.
Step 2. Correct Internal Problems
1. Summarize all internal problems for all collection customers to determine which problems recur the most frequently. Sort the list in declining order of frequency.
2. Meet with the assistant controller to determine what actions to take internally that will correct these problems.
3. The internal controller meets with the controller regarding these issues, who meets with other department heads to determine a course of action.
4. The controller regularly follows up on these issues and consults with the collections staff to see if problem areas are declining in frequency.
Step 4. Increase Collection Activities
If the problem is deemed to be with the customer, then meet with the assistant controller to determine the best course of action, which can include a reduction in credit terms for future orders, an increased number of collection calls, dunning letters, or referral to an attorney or collection agency.
Has It The Right Time To Take Legal Action To Collect From A Customer?
Initiating legal action against a customer is an enormously expensive and prolonged undertaking that is almost never worth the effort. The only party that is assured to come out ahead on the situation is the lawyer. Even if the court awards a substantial settlement, the customer may go to great lengths to hide its assets, so the company never collects a dime. The solution is to always prescreen a customer’s debts prior to initiating a legal action. This should at least involve purchasing a credit report on the customer to determine the number of judgments and tax liens already filed against it, as well as other types of outstanding debt. This type of investigation may very well reveal that the customer has so many calls upon its assets already that an investment in legal action is completely uneconomical.
A low-cost legal technique that may rattle an intransigent customer is the threat of a small claims court filing. Even if the company has no real intent to take an issue to court, just obtain the complaint documentation from the appropriate court, fill it out, and send a copy to the customer, with a note attached stating when the cash has to be in the company’s hands or else the paperwork will be filed with the court. It helps to build up a reference library of small claims court forms, which vary by state (and sometimes by county), thereby making the filing process faster. Claims of this type are generally filed in the county where the customer resides, so a great many forms may be required to cover the locations of the entire customer base.
If the previously noted attempt to obtain payment by sending a small claims complaint to a customer does not work, the next step is to actually file the complaint with a small claims court. This is usually in the county where the customer resides, but can also be where the action over which a complaint is filed took place. In either case, check with the court to verify the maximum amount of money they will address. If the amount being claimed is higher, waive the difference in order to fit under the court’s maximum cap. Also, pull a credit report on the customer to verify its official legal name and corporate status, so this information can be correctly listed on the complaint form.
Finally, locate a collections attorney located near the small claims court and request representation at the court for a modest fee and percentage of any proceeds. These steps are not difficult, and the cost of continuing the process into small claims court is typically far less than the amount of the debt. Also, since a local attorney represents the company in court, the collections staff does not waste time traveling to court. To make the process even more efficient, create a procedure for this process and maintain a list of local attorneys to contact for representation in court. With these steps in place, collecting through small claims court becomes a mechanical and efficient process.
Even if a court issues a judgment against a customer and in favor of the company, the customer may illegally attempt to dispose of corporate assets, so there is nothing left for the company to attach. Thus, after all the time and expense of court proceedings, a company still receives nothing for its efforts. Consider having the court issue a restraining notice to the customer. This is a document stating that the customer cannot dispose of any assets. It is especially effective when used to freeze the customer’s bank account, since the receiving bank will block all account access at once. This approach is useful only after a legal judgment has been obtained, so a customer will have already had plenty of time (possibly years) to fraudulently dispose of assets.
Though the average lawyer can be counted on to have training and expertise in the general conduct of a lawsuit, this does not mean that she has any idea of how to collect the money judgment in the event of a successful lawsuit. Collection requires tracking down the location of assets (possibly through a court-ordered interrogatory), filing the correct paperwork to attach them, and assisting in asset liquidation. Few lawyers have taken the time to acquire this level of expertise. Clearly, finding a lawyer with money judgment collection expertise is of paramount importance if a company regularly finds itself with money judgments but no way to collect. Though one can find the right lawyer through references from other attorneys or collections agencies, this can involve a long process of trying out a succession of lawyers until a productive one is found.