Bookkeeping can be overwhelming if you let it be. There are many moving parts to keep track of, including invoices, receipts, bills, accounts receivable, accounts payable, and more. And all this has to be meticulously maintained to maintain financial excellence and to avoid future IRS audits down the line. This article breakdown some common collections management practices for you to consider for your business.
Fortunately, collections management isn't a dark art. Developing a collections management system and using the right software can transform a collections department into a well-oiled machine. With proper collections procedures, your team can ensure that your company not only gets paid but that it also gets paid on time.
The Collections Management Procedure
Before we talk about how to improve collections, let's talk about how the collections process is supposed to go. The longer invoices are left unpaid by a customer, the higher level of focus they are escalated to.
While most customers will pay their bills in a reasonable amount of time, others will let them go unpaid. This can be due to forgetfulness, a lack of funds, or even out of more nefarious intentions. Regardless, there's a procedure to follow.
Typical steps in the process include:
1. Issuing a Dunning Letter
Dunning letters are more forward than reminders but less aggressive than demand letters. Using automated software can allow these collections letters to be sent out on a schedule so that no bill is left unpaid without a timely reminder.
2. Calling the Customer
If the dunning letters sent have not gotten a response, it's time to initiate more direct contact with a phone call. Team members should record all of the details of the call.
3. Create Payment Arrangements or Adjust the Credit Limit
If you've reached the customer and they request an alternate payment schedule or amount, and this is something your company allows, you can arrange that at this point in the process.
4. Send Them to a Collections Agency
If you can't reach the customer or come to an agreement on payment, you might choose to send the outstanding invoices to a collections agency and put the customer on a credit hold list.
5. Sue the Customer
You may have to meet with your organization's legal team to see whether this is possible, but suing a customer in a small claims court may help you to get payment. The customer will have to have enough assets to pay, however, if you want to use this approach.
6. Write Off the Balance
You may end up having to write off the remaining balance if all other collection techniques fail. Create a credit memo approval form for the total amount of the invoices.
7. Document, Document, Document
After this process has ended, you'll have to analyze it thoroughly. Find out whether there was a problem on the company's end that could have resolved the issue. Call meetings with appropriate team members to conduct a post mortem. Document everything.
Improving Collections Management
Let's start with some tips on how you can improve your collection process by developing a collections management policy. Simple procedures and protocols will take much of the stress out of the process and avoid invoices going unpaid in the first place.
1. Establish a Routine Way to Handle Disputes
If your business is in operation long enough, you'll eventually have to handle collections. Decide on a plan upfront for how you will approach the topic.
Collections can be a touchy subject for customers because no one likes being called and told that they owe someone money. Think of collections as an opportunity to foster a relationship rather than remind a person about a transaction that's taking too long.
Prepare your teams to hear questions like:
- "Can't I pay you next month when my paycheck comes in?"
- "Wasn't the service supposed to be cheaper than this? Why is it so expensive all of the sudden?"
- "Are you sure you mailed it to the right address?"
You may also determine which members of your collections staff will be the ones making contact with the customers for collections. Set up a hierarchy of command in case customers demand to speak to a supervisor.
Clients often just want to be heard, so the staff members that have the best bedside manner need to be the ones placing the initial calls! This kind of stewardship over your collection process will keep the client relationships alive and thriving.
You may also want to have a specific area on your company's website that contains a written FAQ to address some questions regarding collection management information ahead of time. You will still get calls from customers, but this will reduce complaints, as you'll have a clearly outlined policy that you can refer to.
2. Follow Up on Invoices
This will also need to be established in your collection policy to make the process clear. When you're checking your collection records to see who has paid and who hasn't, the customers who haven't paid in a timely way need to be contacted as soon as possible.
The estimated total of unpaid invoices in the United States is a staggering $825 Billion, and 48% of customers delay payments. Calling and asking to get paid drastically reduces the number of unpaid invoices your company will have.
To make sure no customers are blindsided, ensure that each one is aware of the timelines in place for any loan agreements or payment schedules. This kind of preparedness heads off claims of ignorance.
As long as your policies have clearly recorded information that customers can't reasonably claim they didn't know about, you'll be able to cover your bases and uphold your professional standards for collections.
This is what's known as creating an "upfront contract." Layout your collection policy in advance for your customers so they know what to expect if they don't pay on time.
3. Assess Your Collections Process Regularly
If you want control over your cash cycle, you'll need to analyze, analyze, and analyze again. Ensure that workflows are operating at peak efficiency, that you have the right software in place to organize your digital collections information, that the right employees have the right permissions to access documents they need and more.
If you're not getting paid on time or in full amounts, then it's time to make a change.
This also should give you motivation to continually check your collections management policies to make sure they're current and working effectively! This is a task that should be done on a regular basis so that you can adapt your approach as needed along the way. When you update a policy, you can even record updated training for your team members via a webinar. This can help to keep everyone on the same page.
4. What Are Your KPIs?
Know your key performance indicators (KPIs) so that you can determine the health of your collections management department. This goes hand in hand with analyzing your collections process because your KPIs will be your benchmarks to measure success.
Some typical KPIs are:
- Average payment time
- Average payment amount
- Number of customer complaints
- The average time it takes to send out invoices
- Number of credit overruns
- Number of delinquent accounts
These are just a few of the KPIs you'll want to track. You're essentially creating your targets so that you can hit them. As you advance, you may discover new KPIs you should track. Just keep improving!
5. Automate Wherever Possible
Engaging in solid risk management means removing human error wherever possible. Entering physical and digital assets into automation software and/or well-crafted templates does several important things for your accounting and bookkeeping, including:
- Creating a paper trail for audits
- Creating shareable documentation for your accounting department
- Allowing work to happen from any location with cloud-based accounting software
- Ensuring accuracy
- Making it easier to engage in collections procedures
Using software and templates also allows you to store the information in multiple formats for easy review and sharing amongst the accounting team. You can save files as Word docs, PDFs, Excel files, and more.
This is a large part of what we have built with the HappyAR platform.
What You Need for a Collections Call
When you need to make a collections call, it helps to be prepared with the right materials. Here's what you should have on hand:
1. The Correct Collections Documentation
Have the customer account information, invoice(s), collections statements, and any other pertinent documents so that you can quickly and accurately reference the customer's financial history as you represent your institution's collections department.
You need to have proof to support any claims being made. Does the customer say the product was never delivered? Have the shipping receipt. Did they claim they never received services rendered? Have the statement of completion.
3. Notes from Previous Conversations
If your company has had past conversations with the customer, you'll want to have those notes on hand. They can prepare you for your upcoming encounter with them. Review these notes before you make the call.
4. Alternate Contact Methods
Sometimes, the customer won't answer their primary number. Have a backup method, such as a work phone number or a spouse's phone number.
Your collections software can help you to gather this information ahead of time. The more you prepare, the more successful you are likely to be.
Different Techniques for Collections Management
It helps to have different methods that you can use for collections management, especially when you're trying to improve cash flow. Here are some of the most common approaches:
1. Stress the Importance of Due Dates
It might surprise you to learn that graphic design and fonts can help with this. Use highlights, larger letters, different colors, or anything else that can help to make the due date stand out for the customer. Some customers will still say they didn't see the date, but you can at least point out that you do have a due date clearly marked on the invoice!
2. Get Help from a Collections Agency
Collections agencies are experts at getting payments. It's their only job, so they tend to get results. Consider them as a last resort after all other collection techniques haven't worked. They will charge a fee for their efforts, of course, but the alternative is not having any payment from the customer whatsoever.
It's not ideal, but settling for whatever the customer can pay at least nets your organization some money. Plus, if the customer does eventually go bankrupt, they wouldn't be able to pay anything at that point.
4. Give Shorter Payment Timelines
If you find that customers are taking advantage of generous payment timelines, shorten them. Instead of giving customers a month to pay, give them two weeks.
5. Prioritize Customers
Focus your efforts on customers that have the largest amounts due. Small amounts owed may simply need a reminder sent to the customer, while large amounts may need direct calls.
What Happens When I Need Payment from a Bankrupt Customer?
This is not a situation any collections department wants to find themselves in, but it does happen. If a customer goes bankrupt, one option is to file a claim with a bankruptcy court.
Unfortunately, there is no guarantee that you will receive anything close to what the customer owes.
Another option is to sell your claim to an investor. That investor takes over completely and you no longer have to pursue the claim. You will have to prove the payment the customer owes is not disputed, but as long as you have this proof, interested investors will be able to work to figure out the amount of the claim that might be paid.
Both you and the investor will have to come to an agreement on the terms of the sale and then notify the bankruptcy court. As long as the customer has no objections, the sale can move forward.
However, this isn't necessarily a painless process. Some issues may arise, including:
- The seller has to repurchase the claim from the owner if the claim doesn't get paid
- The seller has to pay the investor additional interest if the claim isn't paid
- The seller has to repurchase all claims disputed afterward
- Investors might delay payment to the seller
In some cases, this can be a better option than bankruptcy court, but not necessarily. There may be stiff stipulations you simply don't want to face.
Other Avenues of Collection
While the tips involved in this article are intended to be extensive, they are not exhaustive. There are still more ways to collect and/or notify customers of the need to collect. You can also go through:
1. Your Sales Staff
Sales staff may have access to contact methods or other channels you don't. Their contact list can be extensive, but it might not necessarily be in your collections software or analytics.
Since they may have had the first contact with the customer, your sales teams may also know the best way to get ahold of them. This could be as simple as asking for a business card. You may find that the customer came to the sale with a family member and the salesperson knows how to reach them. You would be surprised how effective your sales team can be in tracking someone down.
2. Your Attorney
Your attorney can issue a strongly worded letter that outlines all of the legal ramifications of non-payment. This letter will carry some weight, especially if it's on official attorney letterhead!
The benefit of this is that your attorney will know what legal rights you have and exactly what you can do if you don't get paid.
3. Your CFO
Ideally, your Chief Financial Officer would be someone who a customer should take seriously. If a customer receives a call or letter from the CFO of a company, it might lend weight to the demand for payment! You can also take the issue to your controller.
The Benefit of the Doubt
Realize that there may be some legitimate reasons why your customer hasn't paid, especially if you primarily serve other businesses with your services. Collections care can make all the difference in getting payment.
Some possible reasons for late or missing payments could be:
- They never received the invoice
- The invoice has not yet been approved
- There's a mistake on the invoice that hasn't been resolved
- The customer can't find their purchase order
This is why it's a good idea not to approach with "guns blazing" via a demand letter or attorney. Again, because you're trying to maintain a relationship with the customer, first try to find out the reason for non-payment.
Now, if you find out that an invoice hasn't been paid deliberately, that changes the equation. The collections staff can then escalate and use further collection techniques to seek payment.
Help with Collections Management from HappyAR
Ultimately, the goal is to get your company paid, but you want to make sure you keep getting paid. The customer is, most of the time, happy to pay you for your services and products.
By establishing some rules and protocols for collections, using as much automation as possible, being upfront with customers, and following up with them, you will increase your cash flow and get paid much sooner.
The good news is HappyAR is here to help. With unrivaled compatibility with your existing accounting software, HappyAR has helped businesses just like yours refine their collections processes and increase payments. Talk to the HappyAR team today — you'll be happy you did.