Managing your company’s accounts receivables is one of the most critical aspects of fiscal health. Yet, many business owners fail to effectively handle their accounts receivables, either directly or indirectly. Poor accounts receivables policies can lead to a bevy of problems involving client relations, cash flow, tax return complications and even legal issues. Seven of the biggest mistakes in handling accounts receivables are outlined here, with advice about how to avoid each one.
1. Letting Accounts Receivables Age Too Long
The longer your accounts receivables age, the more of a threat they become to your cash flow. Also, the longer you let these sit without contacting the debtor the less likely it is that you’ll ever get paid.
Run your aging accounts receivables reports weekly to stay on top of things. As soon as a receivable becomes over 30 days due, you should take action. This can be with an email reminder, a phone call or a statement notice. This will help prevent cash flow problems in your company and remind debtors of their obligation to your company.
2. Not Complying With Debt Collection Laws
Your accounts receivables team needs to be aware of the collections regulations in your area. In addition to federal laws, there may be state laws in place that govern collection calls. If anyone in your company falls afoul of the relevant laws, your company would be vulnerable to legal action.
Since overdue debt collection is such a sensitive issue, it’s good practice to designate just one person in your company to make collection calls. That person would be responsible for keeping abreast of regulations as well as for keeping detailed records of each call. An added benefit to this method is that the debtor has just one point of contact in your company to communicate with regarding the issue. This makes things simpler on their end whenever they need to call with updates.
3. Allowing Only One Payment Method
Often, your debtor wants to pay their bill but can’t because of cash flow problems. They won’t necessarily come out and say it because that would be admitting that they don’t manage their own cash flow very effectively or that they don’t have any liquid savings. When you only allow one payment method, you’re inadvertently restricting your clients’ ability to pay.
Offering more than one or two payment methods is a way to give overdue debtors a chance to settle their account with you in a way that they can financially manage. You could either offer multiple payment methods to all your clients or make it a special offering exclusive to overdue debtors. Suggestions include:
- credit card payments
- in-house debt financing with interest
- interest-free installment payments
- automatic deductions from their bank
4. Not Sending Reminders
When you fail to send reminders of an overdue debt, it’s easier for a client to “forget” it. By keeping silent about it, you’re sending a subtle message that the debt isn’t important enough to you to take action. And if it isn’t important to you, it surely won’t be a priority to the debtor.
Reminders give your debtors slight pressure to get overdue bills taken care of. They keep your overdue receivables in the foreground of their minds instead of allowing them to be easily forgotten. Reminders also subtly let your debtors know that you haven’t forgotten the debt and that you don’t intend to.
5. Extending Credit Indiscriminatingly
The fastest way to draw the short stick with your accounts receivables is to give generous credit lines to non-creditworthy clients. Odds are high that if they didn’t pay their bills with previous companies they aren’t going to pay yours either.
Don’t implement a company-wide credit policy. Instead, whenever you take on a new client for whom you will be extending credit, contact references for payment histories and/or perform a business credit check. That way, you’ll fully understand your level of risk and can make independent credit decisions accordingly. Don’t feel like you’re crossing boundaries with this simple check. Reputable companies with nothing to hide almost expect it.
6. Omitting Overdue Payment Policy on Invoices
When you fail to state your company’s policy on overdue payments, you give your debtors excuses and leeway to not pay your accounts receivables on time. Omitting overdue payments policies also severely limits your available recourse in the event that you need to take legal action.
Your overdue payment policy should be clearly stated on either the front or back of all your invoices. if you choose the back, be sure to put an asterisk comment on the front that indicates that the full policy can be found on the back (or second page, in the case of a digital invoice). Also, best practices dictate that overdue invoices should start accruing interest after a certain amount of time. Be sure to state your interest policy as well.
7. Having Too Lax of a Credit Policy
When you extend generous lines of credit to clients, you’re essentially shouldering that debt yourself. If your credit policy is too lax, you could ultimately inhibit the growth and stability of your company. Too lax credit policies include:
- excessive lines of credit
- little to no interest accrual on overdue debt
- no pre-credit background checks
- no definitive aging policy when final payment is due
- no set repayment plans
Carefully consider your company’s ability to hold debt. Can you really afford to let your clients go for long periods of time without paying? How will that affect your cash flow?
While it’s good business to extend some lines of credit to certain valued clients, you should spend time fleshing out a detailed credit policy that protects your interests. If you need help ensuring that you’ve covered all the bases with your credit policy, contact your trusted financial advisor.
Remember that the condition of your accounts receivables impacts your own business credit, stability and reputation. These are the biggest mistakes that commonly occur with accounts receivables. Avoiding them will enable you to keep your company financials in the best possible shape.
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