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A Wise Man Once Told Me…How To Manage Your Accounts Receivable

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Brett Rea, CPA

Brett learned early on from a wise client how to manage accounts receivable.

Early in my career I had the good fortune to be assigned to work on a client of the firm who taught me in ways he probably did not realize at the time.

He had a way of taking aspects of business that seemed to be great challenges to others and distill their management into simple, straightforward steps. As a young accountant, I would make it a habit whenever I could to sit in his office at the end of a workday to give him a recap of my work for the day, while secretly hoping he would continue the talk so I could soak up anything that he said.

What I Learned From Him About Managing Accounts Receivable

First, realize that it is not sales that count, it is collections that count.

To a small business owner, the allure of making a sale can blind us to the issues that may stand in the way of collecting on the receivable. It is easy to get so excited about a new customer, a large invoice to a not yet mature customer, or worse yet, a sale to a customer already delinquent in their payments to you, that you turn a blind eye to the challenge of collecting. A sale on which you do not collect is far worse than no sale at all, because you have invested resources, including time and money, in the sale that could have better served your business another way.

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So do your homework, be careful about extending credit, for how much and for how long. Once the sale is made, be diligent about collecting.

Collecting Open Invoices

Like many things in business, maximizing the likelihood that a customer will pay an open invoice involves putting a good set of standard procedures in place and sticking to them consistently. Set terms and train your customers to expect that you will monitor their compliance with the terms and remind them of the terms. Nothing will assure slow payments more than your customer realizing that you are not paying attention to the delinquent accounts.

My client taught me that when you contact your customer about a past due invoice, there is a limited number of possible responses to your inquiry, and you can train an assistant in how to handle each, how to document the follow up, and when the issue should be elevated to your attention.

Prepare For Likely Responses When Collecting From A Client

Likely responses to the inquiry and follow up are:

1. “I did not get the invoice”

Send a copy of the invoice and confirm receipt. Set an expectation for a time frame for review and payment of the invoice and calendar a follow up contact.

2. “I have sent a check in payment”

Ask for the date of the check, the check number, the amount of the check, and when it was mailed. Set a date to follow up again if the check is not received when expected.

3. “The payment will be made by a certain date”

If that date is acceptable, calendar a follow up contact to be sure the payment is on its way, and ask for the check details as in number 2 above.

4. “I was not satisfied with the product or service”

Refer the matter to the person in your company who is responsible for the customer satisfaction, and be sure this is followed up and resolved. Of course, it goes without saying that providing an outstanding product or service with which your customers are satisfied is the first step in getting paid for it!

All of this should be done in a friendly and courteous way, making sure that the customer knows that your company values their business. Realize, though, that as a business struggles to pay vendors, the owner of that business must set priorities, and if we do not diligently follow up on receivables and we continue to provide our product or service, we give that business owner the go ahead to make another vendor their priority.

Make sure that you pay your salespeople based on collections and not based on invoices sent. This will get them involved in the collection process and make them your allies in making sure you get paid.

And the last thing the wise man told me was never to let a customer owe you enough money that it makes sense for them to consider changing to another service provider to get away from the money they owe to you. The last position you want to find yourself in is considering suing to get paid.

And there you have it, a lesson learned from a wise teacher, and now passed on.

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This was a guest contribution from Brett A. Rea, CPA. Brett is a principal at Savastano, Kaufman & Company, LLC in Fair Lawn, New Jersey. Brett has over thirty years of experience in public accounting serving closely held businesses of all sizes. He was a member of the firm when it was founded in 1986 and became a principal in 1990.

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