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Accounts Receivable

10 Accounts Receivable Collection Techniques



Accounts Receivable Collection TechniquesThe collection of overdue accounts receivable can be a messy and prolonged affair that results in irate customers and poor collection results. However, when properly organized, it can result in better customer relations, greatly improved cash flow, and fewer bad debts. To achieve this condition, the underlying collection methodology must be changed, as well as the methods used for contacting and dealing with customers.

This post provides 10 techniques that you can adopt to improve accounts receivable collection. Although 10 techniques recommended may still allow some bad debts to occur, but the frequency of their incidence and their size will be reduced through the continuing attention to problem accounts that have been outlined in this post. Enjoy!



The first step in improving the collection function is to re-organize the system that tracks overdue accounts. One approach is to purchase a collections software package that can be custom-designed to link to the existing accounting system. These packages contain a number of features that are most useful for the collections person, such as assigning certain overdue accounts to specific collections employees, so that they only see the accounts of customers assigned to them. The software also tracks contact information, stores notes about the most recent conversations with customers, and issues automatic reminders on the dates when customers should be called (even prioritized by time zone, so that calls will only be made during a customer’s business hours). These systems can automatically issue dunning letters by fax or e-mail. The end result is a much more organized approach to collections than is normally the case.

If a company cannot afford to invest in such an automated system, it is still possible to create a simplified paper-based system that provides some of the same functionality, though not with the same degree of efficiency. For example: customers can be allocated to specific collections personnel and the accounts receivable aging report sorted in accordance with that allocation, so that subsets of the report are given to each collections person. Also, many aging reports include information about the contact name and phone number for each customer, so these reports can be used as the basis for collection calls. In order to create a history of contact information, each collections person can maintain a binder that includes for each customer a list of alternate contact names throughout their organizations, as well as the resolution of preceding collection problems.


Here are some of the techniques one can use to contact and deal with customers that can greatly improve the amount of money collected, as well as the speed with which it arrives:


Technique-1. Approve Credit Levels in Advance

Before the sales staff makes a sales call, they should first contact the credit department to see what level of credit will be granted. By doing so, the credit department’s staff is not placed in the uncomfortable position of approving credit after an order has been received. However, this approach is not of much use if there is limited customer information available, or if the dollar volume of each sale is so small that there would not be much risk of exceeding the credit level.


Technique-2. Show Respect

Overriding all collection actions taken, it is critical to treat customers with the proper degree of respect. In the vast majority of cases, customers are not trying to actively defraud a company, but rather are trying to work through a short-term cash shortfall or perhaps have mislaid the payment paperwork. In these cases, shouting at a customer in order to obtain payment will probably have the reverse effect of being paid later in retaliation for the poor treatment.


Technique-3. Increase the Level of Contact

In keeping with the first point, the level and intensity of contact should gradually increase as the delinquency period extends. For example, the accounting system can automatically send out a reminder e-mail or fax just prior to the due date on an invoice, which may be sufficient for someone at the customer to verify that the paperwork is in order and ready for payment. Then, if a payment is slightly overdue, a collections person can send a polite, non-confrontational fax to the customer. The next level of contact would be a friendly reminder call that follows up on the information in the fax. If subsequent calls do not rapidly result in resolution, then the level of contact increases by shifting to the manager of the accounts payable staff or some higher accounting position, possibly extending up to the owner or president. Only after these attempts have failed should the intensity of contact become sterner, progressing through more strident dunning letters, shifting to a letter from the corporate attorney, and finally being moved to a collection agency. By taking this approach, the vast majority of all contacts are made in a low-key and non-confrontational manner, which sets the stage for good long-term collection relations with a customer.


Technique-4. Involve the Sales Staff

The salesperson who initially sold the product to a customer will have different contacts within that organization than those used by the collections person. By asking the salesperson to assist in collecting funds, a larger number of people can be brought into the payment decision at the customer location. This is particularly effective when salesperson commissions are tied to cash received, rather than invoices issued. Also, if the sales staff is aware of credit problems, they will be less inclined to exacerbate the situation by selling more products to the customer.


Technique-5. Contact in Advance for Large Amounts

If a company has extended a large amount of credit to a customer for a specific order, it makes sense to contact the customer prior to the due date of the invoice, just to make sure that all related paperwork in the accounts payable area is in order, thereby ensuring that the invoice will be paid on time.


Technique-6. Document All Contacts

If there is no record of whom a collections person talked to, or when the discussion took place, then it is very difficult to follow up with the correct person after the previously agreed-upon number of days, which results in very inefficient collections work. Instead, each collections person must diligently maintain a log of all activities. If possible, the accounting system should also generate a trend line of payments, so that a collections person can see if there are any developing cash flow problems at a customer.


Technique-7. Agree To and Enforce a Payment Plan If Necessary

If a customer simply has no cash available with which to pay off an account receivable, it is reasonable to accept a payment plan under which portions are paid off over time, though one should attempt to obtain payment for the cost of the product as early as possible, so that only the profit margin is delayed. This keeps a company’s own cash position from deteriorating, so that it can continue to pay its own bills. If a payment plan is used, the collections person should send a letter by overnight mail to the customer, confirming the terms of the agreement, and then contact the customer immediately if a scheduled payment is late by even one day, so that there is no question in the customer’s mind that the company takes the collection process seriously, and will hold it to the terms of the agreement.


Technique-8. Obtain return of goods if cannot pay

There will be a few instances in which the customer has no ability to pay the company at all. When this happens, try to persuade the customer to return the products to the company, even agreeing to pay for return freight if necessary. By doing so, the company can resell the goods and earn its profits elsewhere. This concept does not apply if the goods were custom-made, if freight costs are excessive, if the selling season is over, or if the goods may have sustained some damage.


Technique-9. Alter Credit Terms for Problem Customers

If it is apparent that a customer is having ongoing trouble in paying for invoices, then its credit terms must be restricted. This can range from a minor reduction in the dollar total allowed it, or can extend to the use of cash on delivery or even cash in advance terms. This is also an effective collection tool, for the imposition of onerous terms can make a customer more likely to pay for outstanding invoices, if there is the prospect of easier terms once the invoices are paid.


Technique-10. Block Shipments to Problem Customers

If a customer has additional orders in process within the company, the collections person should be able to block their shipment until payments have been received on existing invoices. This action is made easier in some enterprise resources planning (ERP) systems, where one can freeze customer orders in the computer system by resetting a flag field in the accounting database.

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