Collect Your Accounts Receivable Before They Turn Into Bad Debts

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Reprinted From:The News Journal
Businesses have reported large increases in bad debts recently. Implementing sound collection procedures should be a high priority these days with the ever increasing spiral of bad debts. Do you have a problem with your outstanding accounts receivable? Your accounts receivable aging reflects the average period that your accounts receivable are outstanding is 75 days. There is not much doubt that if you do not have a problem now, you are headed for one.

It is estimated that by the time accounts receivable get into the sixth month of being outstanding, nearly 50% will not be collectible. By 12 months, over 70% of all outstanding receivables will become uncollectible. The collection industry estimates that 3-5% of consumer accounts and 2-4% of commercial accounts are never going to be collected. By improving collection procedures, these numbers can be decreased so that consumer bad debts will be no more than 2-3% and commercial accounts will not exceed 1%. It is important and necessary to install good procedures to maximize collectibility of accounts receivable.

In a depressed economy such as exists today, more attention than normal needs to be paid to accounts receivable. Many businesses are finding that their accounts receivable outstanding have been so for a longer period of time than is normal and customary. Accounts receivable monitoring and management can make a difference.

All businesses should make use of credit applications and do credit checks where possible. Keep an eye on customer payment patterns, where appropriate, act fast with those who are likely not to pay their obligations. Anticipate potential problems, secure updated credit information and use it. By managing your accounts receivable starting with the issuance of initial credit, many bad debts can be avoided, and at the very least, collections can be quickened.

Steps that will help manage accounts receivable are:

  1. Set up a collection system with the best possible personnel assigned to this function.
  2. Perform credit checks and require credit applications to be completed before accepting orders.
  3. Establish that the customer is credit worthy.
  4. Make telephone calls requesting payment at the earliest possible time. In many situations this means that at 31 days if your invoice is unpaid, contact the customer and request payment.
  5. Keep a record of telephone calls and correspondence regarding requests for payments.
  6. Determine at what point credit should be restricted until past due invoices have been paid.
  7. Structure a payment schedule for overdue accounts where appropriate, but make sure that the customer holds to the agreed upon schedule.
  8. Develop management reports that the executives in your company will utilize. Reports may include a history of problem accounts, a list of accounts that have undergone adverse change in their dealings with your company and an aging report of accounts.
  9. Involve collection agencies or legal counsel when management's efforts have failed to collect the money that is due. It is wise to involve collection professionals early in the process rather than waiting until the situation is hopeless.

No matter how difficult the economy or banking requirements, management that is solid and has put the right effort into accounts receivable management can secure reasonable assistance from the banking community. It has been said that bad debts are worth collecting. The person who coined that phrase was trying to tell us that each and every accounts receivable is better in our pocket rather than being converted into a bad debt that will have a very negative effect on our bottom line.