How to Collect Accounts Receivable?

How to Collect Accounts Receivable

Collecting accounts receivable involves a proactive approach to managing a company’s outstanding invoices or the money owed by their clients. Here are some steps you can take to collect accounts receivable:

1. Clearly Defined Payment Terms: Ensure that your payment terms are clear, and your clients are aware of them. This includes information such as when payment is due (like Net 30, meaning 30 days after invoice date), accepted payment methods, and any late payment penalties.
2. Prompt Invoicing: Bill your customers promptly. The sooner you send your invoice, the sooner you are likely to get paid. Make sure the invoice includes all necessary details and references, so the customer knows exactly what the payment is for.
3. Regular Follow-up: Keep a regular schedule for following up on invoices. A gentle reminder a few days before the payment due date can help ensure timely payments. If an invoice becomes past due, follow up immediately.
4. Keep Accurate Records: Maintain accurate and up-to-date records of each customer’s billing history. This will help you spot any trends or issues, such as customers who frequently pay late.
5. Establish a Collection Procedure: Develop a systematic approach to dealing with late payments. This may include sending reminder letters, making phone calls, and eventually hiring a collection agency or considering legal action for extremely delinquent accounts.
6. Consider Offering Discounts: To encourage timely payment, you might offer discounts to customers who pay their bills early. This is known as an “early payment discount”.
7. Use Technology: Consider using accounts receivable software that can automate many of these tasks, such as sending out invoices, reminders, and tracking payment status.
8. Review Credit Practices: If you offer credit to customers, it’s crucial to conduct thorough credit checks before doing so. Offering credit to high-risk customers could result in more late payments.

It’s important to remember that while these practices can improve collections, they are not guaranteed to eliminate late payments completely. Having a plan and approach in place can help a business manage its cash flow more effectively.

Example of How to Collect Accounts Receivable

Company: Awesome Web Development Co.

Client: Best Restaurants Ltd.

Invoice Amount: $5,000

Invoice Issue Date: March 1, 2023

Payment Terms: Net 30

Due Date: March 31, 2023

As per the scenario, it’s now April 15, 2023, and Awesome Web Development Co. has not yet received payment from Best Restaurants Ltd. Here’s how they could handle their accounts receivable:

1. Clearly Defined Payment Terms: The payment terms were defined as Net 30, meaning payment was due within 30 days of the invoice date. The client was aware of these terms when the project began.
2. Prompt Invoicing: Awesome Web Development Co. sent the invoice promptly on March 1, 2023, when the web development project was completed.
3. Regular Follow-up: When the invoice hadn’t been paid by April 1, 2023, Awesome Web Development Co. sent a friendly reminder via email. Since they did not receive a response, they followed up with a phone call on April 5, 2023.
4. Keep Accurate Records: They have been maintaining accurate records and notice this is the first time Best Restaurants Ltd. has been late with a payment.
5. Establish a Collection Procedure: As part of their collection procedures, on April 10, they sent a more formal reminder letter, stating the invoice was overdue and requesting immediate payment.
6. Consider Offering Discounts: While they don’t offer early payment discounts in this case, it’s something they’re considering for future invoices to incentivize timely payment.
7. Use Technology: They use accounting software which tracks invoice dates, amounts, and payment due dates, and alerts them when an invoice is overdue.
8. Review Credit Practices: Best Restaurants Ltd. had a good credit history before this incident. However, Awesome Web Development Co. decides to review its credit practices and policies to avoid future late payments.

In this scenario, by following these steps, Awesome Web Development Co. is proactively managing its accounts receivable and taking necessary actions to collect the overdue payment.