Here’s an encouraging fact: there are things you can do with your business to improve the financial efficiency of your company! One of those things is to incorporate a few simple processes into your company’s accounts receivable department. Improving your system of accepting and managing receivable accounts will help you to collect revenues more quickly, and will minimize your organization’s propensity to lose money to bad debt.
Step 1: Improve Contractual Legalese
To begin, you can draft a series of letters that outline your company’s financial policies, to include specific procedures such as those surrounding credit, billing, and collection. Codified policies provide transparency across the organization, provide a starting point from which you can consistently deal with real world situations, and become a benchmark against which you can improve. Be sure to consider the following:
Establish contractual clauses that protect your organization from customers who purposefully neglect to pay their debts.
Each state has different rules and regulations surrounding collections procedures. We have found that including the following statement is a good way to ensure a judge will grant your company additional costs incurred by the process of collections.
“In the event that [CLIENT’S] account becomes past due and is referred by [SERVICE PROVIDER] to an outside collection agency or attorney, [CLIENT] will be responsible for the cost of collection services at the rate of [COLLECTION AGENCY RATE AS A PERCENT] of the balance due, along with reasonable attorney fees and court costs incurred by [SERVICE PROVIDER].”
Placing exact costs (e.g. 20% as the collection agency’s rate) makes the contract much more enforceable in a court. Leaving this section arbitrary (e.g. “reasonable costs”) typically allows the judge to apply their own subjective judgement to the situation and may or may not be legally binding.
Include in your contracts a section that permits you and your business partners to contact the debtor on a cell phone. The Telephone Consumer Protection Act (TCPA) regulation restricts communication between creditors or collection agencies and debtors, and it is possible to break a law without realizing it if you do not have explicit permission to contact the client via their cell phone number.
Step 2: Codify Company Policies
Codify the acceptable means of payment (e.g. cash, check, credit card, et al.), the timeframe for acceptable payment, and the internal steps to be completed in the event that prescribed timelines are not met. These are important parts of pre-collection programs. Steps might include an email notification with an copy of the invoice for payments that are 45 days late, a phone call for payments that are 60 days late and a final notice with return receipt for payments that are 90 days delinquent. This is not meant to be a general guideline but rather a suggestion of one possible and very simplified procedure for dealing with an account past due.
Establish late payment notification procedures to include invoice timing, notification of late payment, and the delivery of a final notice prior to placing an account in collections. For a discussion of final notice best practices read here. If possible, automate this process using customer management software that sends internal notifications to personnel (either your employees or your clients) when a particular action is required.
Step 3: Make Adjustments Based on Successes and Failures
Once you outline a policy, be prepared to alter it quickly and frequently based on real world feedback, constructive criticisms, and new evidence that suggests there is a more efficient way of dealing with a problem.
Step 4: Make a Priority of Collections
Accounts receivable are the low hanging fruit that can make a big difference in the profitability of your organization. Make sure not to treat the process in a cavalier manner. Bring young employees up to speed early. If you or your staff are uncomfortable making collections calls then discuss the matter with an agency like National Service Bureau. We can customize a pre-collections recovery program as a means to minimize the amount of bad debt you are forced to write off on an annual basis.