The Art & Science of Collecting Accounts Receivable
By Mac Carraway, Carraway Consulting
With the current upheaval in many segments of the economy, collecting your accounts receivable (AR) has probably already become more difficult. Collections can be a tricky business, even in good times. But there are steps you can take that work, as proven by the experiences of the Great Recession, which may have seen the most prolonged grind of collections effort in modern history. What are the keys to AR collection success? The following bullets are offered from much experience and hard lessons.
- Get started early. Delay offers your customer the opportunity to pay someone else (with your money) before they pay you!
- Communicate – know the person who makes the decisions on payment in your customer’s organization and talk to that person on the phone. Emailing is easy to ignore and should only serve as a reminder of commitments made in a voice-to-voice conversation. If the account is large, consider an in-person visit if the circumstances warrant it. This may be to two people: their accounts payable manager/ accounting manager/controller and the owner.
- Stay in touch. Let your customers know you need for them to keep you posted on their progress. If they do not follow up on time, you have to. Call them.
- Establish agreement on hard deadlines for payments, especially for installments on accounts that become “workouts”. Close this deal.
- Workouts and installment plans can be useful on a case-by-case basis.
- Switch to COD when you need to. It’s a tough but necessary call to make sometimes. Partial COD (e.g. 50% now, 50% net 30 -OR- installments on a prior balance with all new orders on COD) can be effective too, particularly if you are trying to help a good customer through lean times that already has a balance they are chipping away at. It is a way to share the burden.
- Get personal guarantees from owners when you can or when you have to. Most companies will reject this, but it may be the only way to collect when things are really tough.
- Know your mechanics lien rights and use them! Align yourself with a reputable lien management organization or work with your business attorney to take maximum advantage of this very powerful tool which connects you with the deepest pockets. Liens are time-sensitive and failure to STRICTLY adhere to the prescribed deadlines results in the IRREVOCABLE LOSS of those rights.
- When all else fails, be prepared to file a collection lawsuit if the dollars warrant the expense and effort. For balances under $5,000, you can do it yourself in small claims court. If you see this coming, be the first one on the record with a court judgment.
- In all matters related to collection, be decisive!
The collections effort should be as personable as possible. Ideally it should be handled consistently by someone who can handle the pressure and the uncomfortable and unpleasant circumstances that inevitably arise. Your customers are valuable to you and they will appreciate and respond better to an empathetic, professional and friendly approach. But that respect has to work both ways. Keep your antennas up for signs of drift and lack of candor. Remember that you have already delivered on your side of the bargain, giving up valuable inventory on credit terms. Your customer has already sold it to their customer, so that cash should be FOR YOU, not for another one of their creditors.
In the end, there will likely be some losses. Lost collections of AR are painful because they are “margin dollars” that come right off of your gross profit margin by 100%. Accordingly, it pays to invest in consistent collection processes to make the best of your specific situation. You’ll be glad you did.
Mac Carraway is president of Carraway Consulting in Bradenton, Florida. Mac has an extensive background in accounting, agribusiness management, and governmental and regulatory affairs. He is an advisory member to the TPF Board of Directors. Visit www.carrawayconsulting.com to learn more.