If we think of cash flow as important as oxygen to the human body, then accounts receivable is as important as the lungs. When extending credit to clients or invoicing them for goods and services, we're expecting pure, clean cash to flow back into our business. If invoices remain unpaid or the client's credit is unreliable, then the cash flow becomes clogged, effectively killing the business.
Use these tips for the prevention of accounts receivable delinquency.
Define Delinquency
Depending on your payment terms and type of business, you may allow some leeway for client payments. Maybe you're not concerned until the account is 30-days past due. For others, day one past the due date could be considered delinquent. It's important to set boundaries and expectations with your clients within the client contract. Your clients will recognize that their account is delinquent based on your agreement and/or the payment terms on the invoice.
Analyze Commercial Credit
Before extending credit to a new client, it's important to understand the creditworthiness of the business. A credit analyst is an important role within the accounts receivable department to prevent accounts from going into bad debt or delinquency. They examine the character, capacity, capital, collateral, and conditions of credit risk. From the analysis, they will be able to determine if the business can be trusted to pay, how much they can pay, and if they'll be paying on time. The credit analysis will also determine payment terms which could be different for each client.
Run Aging Reports
Regularly surveying aging reports will provide a clear picture of the accounts that are delinquent or will soon go into delinquency. This proactive activity will inform those in accounts receivable or collections to begin stronger efforts to collect. Follow-up attempts may start with a friendly reminder or demand letter to advise clients that their account is past due. Accounts that are 45-60 days past due may be moved to collections or outsourced to a third-party collections agency.
Document A/R & Collections Policies
With documentation of the procedures required to issue a credit to clients, invoice, follow-up, and outsource accounts to collections, your business can effectively prevent or at least minimize the risk of accounts receivable delinquency. These accounts receivable and collections policies will define responsibilities, manage credit standards and provide a process to follow when late-paying accounts slow down cash flow. Instead of holding your breath to see if your clients will pay on time, use these tips to feel more confident in your A/R and collections.
