Check Your Accounts Receivable (Even If It’s the Last Thing You Want to Do)
Why? Because the older an outstanding debt is, the less likely it is that you will ever be paid.
If your business bills customers after you’ve performed a service or shipped a product, then you know that your accounts receivable is the lifeblood of your business. But knowing how much you’re owed is only half the story. It’s just as important to know how old those outstanding invoices are.
Why? Because the older an outstanding debt is, the less likely it is that you will ever be paid.
On average, 26% of invoices that are more than three months old will never be collected. That number shoots to 70% at six months and 90% at 12 months, according to CFO Selections. That should inspire you to be checking your accounts receivable aging summary regularly.
If you really want to get technical, you can do an equation called ART (Accounts Receivables Turnover) ratio, which will tell you how many times a year you collect your average accounts receivable. But, for most small businesses, just looking at your AR aging summary is enough to tell you who you need to focus on collecting payments from.
26% of invoices that are more than three months old will never be collected
Being proactive and reaching out to customers whose payments are overdue could significantly increase your success in getting paid. The trick is frequent and consistent collection efforts, according to consulting firm Deloitte. And training your employees to deal with difficult customers will also help. (You might even consider giving employees a bonus based on the percentage of outstanding invoices they collect.)
In addition to phone calls and emails, you might consider offering text message payment as an option. Making it easy for customers to pay is never a bad idea. (More here on how to get paid via text message.)
To encourage early payment, you might consider a discount for quick payments or payment plans for customers that can’t pay all at once, according to City National Bank. Making sure your customers know your payment policies in advance is also important.
If your own collections efforts aren’t working, it may be time to consider a collections agency. FITSmallBusiness suggests you send four collection letters before referring the debt to a collection agency. You can see examples of how to write collection letters here.
Most collection agencies work on commission, so you won’t have to pay unless they collect your outstanding debt. Here’s what to consider before you make that decision.
If you’re worried about upsetting a customer, though, remember that to stay in business, you need clients that pay. Anything less is not fair to you, your employees and paying customers who rely on your services.