Successful collection of money owed ( accounts receivable or AR) to the business is obtained by following three basic principles:

  1. Preparation
  2. Process
  3. Persistence

[NOTE - Have your attorney review your collection procedures before you implement them to make sure that whatever method you use to collect, you are within the established legal and ethical guidelines for collection of debts. See the Federal Trade Commission’s “The Fair Debt Collection Practices Act”  as well as state laws/regulations involving deceptive or unfair collection methods.]

Principle 1: Preparation

Preparation Step A: One of the major impediments to collecting money is simply not knowing who the players/people are inside the client who is not paying. You need to know who is really empowered to make payment decisions. This can be difficult when the situation has become adversarial as the debtor simply will not tell you much. Therefore, when establishing a new major client, their completion of a credit application form (See SCORE Brief 4.31 Granting Credit to a Customer ) will provide the names that you will need to contact when the going gets rough.

Preparation Step B: Clearly set and communicate to the buyer:

(1) Terms of payment for the sale, and

(2) Steps you will take if payment is not made per the agreed-to terms.

Steps you might take could include: cutting off further open credit, late payment penalties, shutting off or withdrawing service, or sending the account to a collection agency [typically not very successful].

[ NOTE - Consult with your attorney before you actually stop services to make sure you are not “harming the clients business” for which you could be liable].

Sending the client written notice before the first sale and then continuing the payment terms on each and every invoice is recommended.

Preparation Step C: If at all possible, send all invoices to the client’s Accounts Payable (AP) function in the accounting department. Let the client’s AP department handle the internal approval steps. All too often if the invoice goes elsewhere, it: (1) does not get logged into the clients accounting system or, (2) is held up or lost by some approval individual. Always check first with “accounting” to see that your invoice is actually recorded in their financial system and simply not “lost or being held” somewhere else.

Principle 2: Process

Establish a written “process” for collection activities. It is important to have a well understood process and a good understanding by your AR collections person of what steps to perform and how to record them. Also, it is important to be timely with your collection efforts because most collections fail because of waiting until it is too late to be successful.

The steps needed in the collection process are:

1. Establish an internal communication/documentation system that does the following:

  1. Record the collection activities (who, when, what was to be done and by whom) for each client with aged ARs.
  2. Maintain a historical account of past collection activities, the bad ones are repeaters.
  3. Provide an automated reminder system to your AR collections person and management staff. NOTE: This can be very easily done with several different simple computer applications. If more than one individual is working on the collection process you will need a server-based or use an Excel sheet stored in a cloud application so all can see and use the same current data.

2. Perform weekly reviews of the Aged AR list for those companies due over 60 days and 90 days. [ For some clients you might use 30 or 45 days due to their past non-payment history or the significant amount of money involved ] Document:

  1. Who will generate the Aged AR list [from your accounting system].
  2. Who will review the list.
  3. Who will take action on the Over 60 day and Over 90 day accounts.
  4. Who will occasionally see that the above is being done

3. For Over 60 day accounts:

  1. Make an initial phone call to the client’s AP person asking “Is there an issue with the product/service your company has provided?” You will quickly determine if the invoice even arrived (50% of time it simply has not). This question will usually flush out the reason for nonpayment. If it has not been approved, ask who does that, then make a call to that person asking the same question about any issues with your product or service.
  2. Now either: a) take steps to resolve the open issues or b) ask for immediate payment. Indicate to the individual your expectations of them and the timing of the next step if it becomes necessary
  3. Then record the transaction and perform your process steps.

4. For Over 90 accounts, you presumably have had several contacts with the client so there should be no “unidentified/unresolved issues”. Ask for immediate payment then indicate in writing [using Certified Postal Delivery] that you will be taking one of several next steps including: action by our attorney, small claims court, or repossession of the product, if applicable.

  1. All over 90 should be handled personally by the owner. Nothing gets attention in a buyers company like your President / Owner calling theirs. This is serious, so don’t leave it to your staff.
  2. Also effective is a simple 1 page letter from your attorney “making inquire” in the expectation of payment. This is an indication of your seriousness and you can probably establish with your attorney a standard minor cost for such a routine letter.

Principle 3: Persistence

Nothing convinces a buyer that you will be seriously proceeding with collections like well executed and consistent communications.

You must do what you say you will do (send a copy of the invoice, return a call on a next established date, ETC) or the buyer will not take you seriously. Nothing is more fearful to a buyer than to know you will be calling again because you have done it before. Secondly, if you do find yourself in court (more likely small claims) a well-documented case history showing consistent communications with the business is powerful stuff.

Unless you put in place a system for documentation of what has happened and an automated system for reminding you to take the next step, you will not be persistent. The keys to successful AR collections are the process you establish and how well you execute it.

The Bad Apple

A high percentage of collection issues occur because: (1) the invoice did not arrive, or (2) someone is unhappy with your product/service and your employees did not resolve it.

Occasionally a “bad apple” buys something from you. When this happens, usually a very short, one page collection letter from your attorney will resolve the issue. If that does not work then you have real issues that are beyond the scope of this brief but you do have two other less complex options of:

  1. Use a collection agency [both expensive and not very successful]
  2. Use the local Small Claim Court [many times very successful, see details below]

If only a small amount of money is involved [usually established by your local Small Claim Court which in Hamilton Court that would be a $6,000.00 maximum], you use Small Claims Court (SCC). You do not need an attorney, but it will take your time. The secret to wining in small claims court is “he who is well prepared with complete documentation of your claim usually wins.”

Use this link to file a claim in Hamilton County Small Claims Court

You will stand in front of a judge who hears both sides and makes an immediate decision. If you are prepared, with evidence of: (1) satisfactory delivery of your product and / or service, and (2) failed collection activities, you will usually win.

Note – these hearing are very short and seldom do you return a second time on the same case, SO the winner many times is the one that is best prepared with evidence in hand [documents, written testimony, email, letters, ETC] that supports your collection claim.

SCC procedures are different in each county, so contact the local county court clerk or online to obtain a booklet that will give you all the requirements for filing a claim. . There are filing costs, but the biggest issue will be the time necessary to get through the claims process and often you will have to return to the court area more than one time.

Remember this is also time consuming for the buyer, so many times they will simply pay up when faced with a letter from the Court saying here is your “court date”.

Also if the client does not show you will more than likely get an immediate default judgement to use for collection.

If you do win, in many courts the collection can be done by the local sheriff / police. There is nothing like law enforcement knocking on your door to get you to write a check.

[ Note – if your claim involves an unpaid credit card purchase be ready for some long, complex and confusing negotiations. Set a policy that you will not take “credit card” sales by phone/web over a certain maximum amount without the client “providing you with a photo copy of the front and back of the card. Contested card sales where the card is “not present” is difficult to pursue as the card companies/banks involved start with the assumption that the seller is where the issue lies]

If you would like to request a Cincinnati SCORE counselor please click here, for a Dayton counselor click here

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