As part of setting up your accounts receivable department for success, it's important to define responsibilities, create job roles and policies to ensure things run smoothly. These roles and policies will include approving clients for credit, setting payment terms and approved methods of payment, invoicing procedures, and what to do if the client doesn't pay on time.
As you're going over tasks for the new year, is it time to update your credit, accounts receivable, or collections policies? Here are three reasons why you should.
Your Aging Report is Out of Control
When you run your invoice aging report, you notice that you have invoices that are 45-90 days or even more past due. Are your clients paying late because they weren't screened as a credit risk prior to being extended credit? Does your A/R department have procedures in place for following up on invoices? Are your payment terms matched with the clients' accounts payable processes?
Your DSO Exceeds Your Payment Terms
Your days sales outstanding (DSO) is a calculation of the number of days it takes for your A/R department to collect on an invoice, basically measuring its effectiveness. It's calculated in this way:
DSO = (Average accounts receivable balance / Total sales in a given period)
(x) Number of days in that period
If you've calculated that your DSO is 48.6 days, as an example, but your payment terms are 30 days, then that's a problem. Is it time to re-evaluate your payment terms or set more stringent credit terms?
Your Cash Flow Has Slowed, Despite Sales
If you're noticing that your cash doesn't seem to be flowing as quickly as your sales, it may be time to get sales involved. Are there procedures in place to ensure that contracts, credit and accounts receivable work together to invoice the client? Has the relevant information been included on the invoices so clients know how, when, how much and who to pay? When your sales department is rocking it but your A/R department isn't invoicing on time, a slow cash flow will affect the success of your business. 
When Your Clients Aren't Paying, Your Policies May Be The Reason
It's difficult to recognize unless you're keeping good accounting records but your credit, accounts receivable or collections policies, or lack of, might be why you're not getting paid. Use this time of year to identify any trends in late or non-payments and re-evaluate those procedures and policies. We've provided sample job descriptions and a sample A/R collections policy template for use as free downloads. If you want help above and beyond that, Enterprise Recovery also provides accounts receivable and debt collections. Let us know how we can help.
