Collecting Past Due Payments

Written by Alverta “Sandy” Steinwedel

Every business owner starts his dream business thinking, “I will do the job and the client will pay me.” Sadly, statistically, this is not the case. Data shows the average time for a small to mid-size business owner to collect an invoice is 48 – 54 days.

Why Is Collecting Important And Why Should My Accounts Receivable Be A Minimum?

Receivables and cash are the lifeblood of a business, and the business owner must keep a watchful eye on the cashflow and limit the receivables. Imagine not having the cash to pay your utilities, wages, employee benefits, supplies, and tools to conduct business.

Having good accounting software is important. The financial reporting it provides gives the business owner a financial picture of the clients who owe money and the amount versus the actual cash required to manage the business daily.

In addition, having large accounts receivable may cause the business owner to be denied for a business loan. Many financial institutions scrutinize a business’s accounts receivable to determine if the business is a good credit risk.

So, What Can A Business Owner Do To Help Minimize Their Accounts Receivable?

The owner needs to decide the policy/terms on how to handle past due accounts in advance, so the client is informed prior to starting business.

1. Internal policies are important such as:
   • Creating a weekly review of outstanding accounts
   • Mailing outstanding invoices on a specific day each week
   • Keeping documentation of steps to collect payment on outstanding accounts
   • Making sure all staff are trained in the accounts receivable policies and procedures.
2. Make sure every contract and invoice outlines clearly the terms and conditions on past due payments.
3. If you had issues with delay of payment from a client in the past, require a retainer or deposit on all future work.
4. Develop various written communications to include with past due invoices.
   • 30-day, 45-day or 90-day
5. Develop a letter to extend a payment option plan with reasonable terms.
6. Develop a final letter for any invoice that is over 90 days past due. Items for consideration:
   • No consideration for future work.
   • If client has been delinquent in the past, consider a paragraph about firing them
   • Warranty expiration or a warranty being null and void due to lack of payment.

It is highly recommended to seek legal advice when preparing communication to clients concerning payment collections. However, a good letter template is a good communication tool.

In closing, it should be the goal of every business to limit their account receivables because the work and the time spent collecting past due payments is not a billable event. Therefore, consider being proactive by offering a discount on the invoice if the payment is made within 20 days of the invoice. An upfront discount will be cheaper than the time and energy spent collecting past due payments.