Accounts Receivable Collection

Accounts receivable collection becomes necessary when customers or clients do not pay their accounts when they fall due, and when they become overdue.

It would be nice if everyone paid their invoices on time ... but this is the real world.

• Some customers are conscientious, others are not
  
• Some are disorganized with paperwork
  
• Some don’t have the money because they:
  a) didn’t budget to pay your bill, or 
  b) haven’t themselves been paid by their customers.

However, you need to get the ball rolling and start your accounts receivable collection procedures.

Here is what this page covers:-

• Contact with the customer and following up non-payments
  
  
• Allowing the customer to pay the account off over several weeks / months
  
  
• The formula for calculating interest

Accounts Receivable Collection Tips:
Contact the Customer

This is a five-step process for a worse case non-payment scenario.

1. a phone call
   
2. another phone call or two
   
3. a letter of demand
   
4. a final letter of demand
   
5. hand over to debt collection agency
   

You could first send a copy of your overdue invoice stamped ‘This Invoice is Now Overdue’ and then wait it out, or you could...

... phone them for faster results:-

First Phone Call Contact

A calm voice from you will prevent the customer becoming defensive. Most people will be apologetic and let you know when they expect to pay. [A few might come up with some excuse as to why they are not going to pay it; you may end up having to take this dispute to the local courts if it's a decent amount.]

If the customer gives you an expected date in the future, add a time to your calendar to check your bank on that date (or the day after) for their payment.

If payment still hasn't come through, ring them again (right away)

Accounts Receivable Collection Tips

Second Phone Call Contact

They will most likely give you an explanation why they haven't been able to pay and give you another date/time frame.

Check on that date and ring again.. this will make them aware that you are not going to forget about it.

Let them know interest will start accruing.

Further down this page are the details for calculating interest.

Once you have made two or three phone calls as above and the customer still hasn't paid, calculate and add the interest and send them a letter:-

First Letter

Make a note on your calendar of when you need to follow up with the second letter. So this will be 7 days after posting the first letter plus another day or two for the travel time of the letter in the post.

If payment arrives in the meantime, great!

However, if not then on that date or the day after, check your bank to make sure it wasn't paid by internet banking.

If no payment has been received, send a second letter.

Wording of first letter

Second Letter

The wording of this letter is stricter to really push this customer into action.

There is no need to add more interest as interest is calculated on a monthly basis and this second letter is only 7 days after the last one.

wording of second letter

By now, your accounts receivable collection methods should have worked and the customer galvanized to pay.

If they settle the invoice in full, but not the interest, you could simply reverse the interest.

Often, it is not worth the headache trying to recover that small amount.

*Also, see Accounts Receivable Procedures. Customers will only be liable for the debt collection fees if they have signed your Terms and Conditions which state they will be liable for these fees. This is why it is an important step to get customers to open an account. If not, the debt collection fees will come out of your own pocket. Debt collection fees start with the next step.

What Next if they don't pay?

If they have still not paid, hand them over to your chosen collection agency so you can focus on the other important aspects of your business.

The debt collection agency will have a really good system in place for handling difficult customers and they usually have access to put a black mark against someone's credit rating.

Paying the Account Off

Your customer might ask if they can pay the account off over several weeks / months. If you are happy to do this then go ahead, but I recommend adding monthly interest because you are not a bank!

If they were to get a loan from their bank or any other place to pay your account they would be charged interest on the loan. Perhaps first suggest they try to get a loan from their bank before agreeing to let them pay it off.

Calculating Interest

Here is a standard formula:-

Average Daily Balance x Annual Percentage Rate

x Number of Days in Billing Cycle ÷ 365

• Say the overdue amount is $500.00
• The month you are calculating for is May = 31 days
• Your late payment charge = 10% per annum
• There are 365 days in a year

$500 x 0.10 = $50 x 31 = $1,550 ÷ by 365 = $4.25

So the interest is $4.25 for the month of May. Add this to the $500.00 and the customer’s total account due is $504.25.When the customer makes a payment apply it first to the interest, and then to the invoice amount.

Many people develop different methods for their accounts receivable collections (aka debt collecting) once they learn what works for them. 

After a bit of practice you will find your groove... keep trying!

Most people are apologetic and have genuine reasons for struggling to pay.

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