A business may be doing very well in most aspects; however, if the business’ cash flow is poor (or lacking) because accounts receivable are not collected on time (or at all), that business will struggle. You need to make sure that the business is paid what is owed and that the check clears. There are ways that you can help improve collections. Good practice will make a tremendous difference.
Ways to Collect Accounts Receivable
There’s one component of business success that is often overlooked by many owners and entrepreneurs: collecting accounts receivable. There are steps that you can take to increase your recovery if and when a collections service should become necessary.
1. Use a detailed and comprehensive credit application: This will give you a comprehensive credit summary of the debtor, which enables you to get a sense of the debtor’s payment history.
2. Follow up with references and do your due diligence: It is really important that you follow the proper procedure. Otherwise, you may be endangering the chances of the debt actually being collected on time (or at all).
3. Retain all correspondence and confirm conversations in writing: The only way to ensure that will be able to collect the debt is if you have documentation, which will not enable to debtor to get out of paying. Having the relevant information in writing will give you the safety net to be able to successfully collect what is owed.
4. Have a good contract with clearly defined terms: At the beginning of your business relationship with the debtor, you will definitely want to draw up a contract that has the debtor’s signature as well as yours as well as the date. That way, there can be no dispute if everything is there in black and white.
5. Obtain personal guarantees when possible: A personal guarantee is a legal agreement in which the business owner (debtor) assumes personal responsibility if that business is unwilling or unable to pay the debt.
6. Obtain a security interest where appropriate: An claim between the debtor and the lender that is enforceable and which fulfills the promise that has been made between the parties.
7. Keep copies of all checks you receive: This is another part of the critical nature of documentation.
8. Generally, credit payments you receive to the customer’s oldest invoice.
9. Act quickly, send reminders, and be consistent: When it comes to collecting accounts receivable, expediency is key. The quicker you act, the better your chances of being successful. You will want to make sure that the person or business that owes you money doesn’t become complacent and totally forget about your existence. You want to communicate regularly and keep communicating until you get what you need.
10. When a lawsuit becomes necessary, don’t hesitate to file: If you have tried everything possible to collect accounts receivable from a specific debtor and nothing has worked, it will probably be time to take more extreme measures. Once you reach that conclusion, you should act as quickly as possible. The more quickly you are able to recover your money, the better for your business. There is absolutely no reason to hesitate.
Collecting accounts receivable is critical to your business’ success. If you are not able to collect accounts receivable from the people and/or businesses that owe you money, that situation will negatively impact your cash flow, which will have a tremendous impact on the success of your business. Communicate in the most effective manner possible but if your initial efforts don’t pay off, you will have to consider more assertive methods to collect what you are owed.