3 Steps to Collecting Receivables

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Internet-1593378_1920When I first was hired as the CFO of the local Coca-Cola bottling plant, one of my first duties was to put together a policy for collecting receivables.  After three months of work, I had reduced our past-due receivables by over 75 percent.  I then wrote up a policy, trained the receivables clerk on the procedures, turned it over to them and moved on to the next problem. 

A few months later the list of past-due receivables was almost back to where it was when I started!  So I repeated everything I did the first time, but this time, I turned it over to my assistant.  A few months later, the problem was back again! 

The third time I fixed it, it stayed fixed.  Why?  I kept receivables as one of my main duties. 

Profit Tip:  No one will work the receivables the way the boss will!  So make it a priority. 

Step 1:  You must make collecting receivables one of your priorities.  Make sure everyone on your staff and all of your customers know how seriously you take this.  The first step is to set aside at least one hour every other week to meet with your staff and work on collecting your receivables. 

Step 2:  Establish a system for collecting past-due receivables.  Automate as much of it as possible.  Here is the system that I used:

  • Sit down with your bookkeeper every two weeks and review a listing of the past-due accounts receivable.
  • Create and send a series of three letters to the slow pays.
    • The first letter should ask for payment and give about 20 days to pay.
    • The second letter, which is sent after 20 days, should be a threat to turn them over to an attorney for collection if they don’t pay in 10 days.
    • The third letter goes out after 10 days and gives them 48 hours to pay before their account is turned over to collections.
    • If they still don’t pay, turn them over to your attorney and forget about it.  Go find a paying customer.  Remember to put that customer on a cash-only basis.  I have seen large companies selling to customers that they have previously turned over to collections because no one remembered to tell the sales department. 

Step 3:  Decide which customers the owner will call personally to collect the receivables.  Owner calls are a vital part of the collection process.  At every bi-weekly meeting the owner should make a list of collection calls to make.  I decide who to call as follows:

  • I call any of my top customers who have become past due.  I treat the first call as a fact-finding mission where I assume that either they don’t have the invoice or that there was a problem with the product or service.  Service issues are often a cause of past-due payment from your best customers, so get involved and solve the problem.  Saving the customer is more important than collecting one invoice.
  • About a week after the first letter is sent out, I have one of my employees call to make sure that the company has received the invoice and find out when payment will be made.
  • The owner should call every customer who received the second letter and try to make arrangements to collect the receivables.  Make sure you are talking to a decision maker, someone with the authority to pay the account.  If there is a large number of calls to make, I would assign the smaller accounts to an assistant.  Be sure they report back on how the call went.
  • Finally, every customer who received the 48-hour letter should get a last-chance call where you negotiate a settlement.  Receiving any amount is better than receiving nothing.  Take postdated checks, credit cards—anything but their first-born child. 

There really is no trick to collecting receivables.  The owner must understand that it is not a sale until the money is in the bank.  Make it a priority and have a system to make it as painless as possible.