Accounts Receivable: Week 2 PDF

ACCOUNTS RECEIVEABLE WEEK 2 THE SECOND STEP: BILLING Often overlooked in the business cycle, the billing process, handled incorrectly or inefficiently, can cost a company thousands of dollars. Those credit professionals looking to improve their collection results should begin by l...

ACCOUNTS RECEIVEABLE WEEK 2 THE SECOND STEP: BILLING Often overlooked in the business cycle, the billing process, handled incorrectly or inefficiently, can cost a company thousands of dollars. Those credit professionals looking to improve their collection results should begin by looking at the billing process. What Is An Invoice? Simply put, an invoice is a bill. It provides the customer with the necessary information to pay for goods ordered and delivered. It should also include any other pertinent information needed to pay the invoice in a timely and precise manner. WHEN SHOULD THE INVOICE BE SENT? Invoices should be sent as soon as possible after the goods have been shipped. The reason for this is simple. Let’s say your payment terms call for payment in 30 days. Most customers will start the clock counting from the time they receive the invoice. Thus, if you only send out invoices once a month, some customers may actually take 60 (or more) days to pay. Now some reading this may declare that the terms are from the invoice date. However, that is not how most customers will count. Additionally, it takes most companies time to process invoices for payment. In many organizations, the invoice must be sent to the purchasing department for approval and then back to the accounts payable department for payment. These steps take time as approving an invoice is not typically a high priority. Also, the customer is in no hurry to make payment so the longer you delay in sending an invoice, the longer it will delay in making payment. While printing invoices every day may not make sense for mid-size and smaller companies, once a month might not be an ideal solution either. Once or twice a week might be a reasonable approach. TERMS The payment terms indicate when an invoice is supposed to be paid. Few organizations will pay early. Many will pay late. It is the goal of the credit department to get as many customers to pay as close to stated terms as possible. The most desirable terms are referred to as open account. This means the customer is given the goods and does not have to pay for them for some time. In many industries the terms are net 30. This means that the customer is expected to pay in 30 days. Here’s where it gets a little vague. The seller wants the invoice paid within 30 days of the invoice date. However, most customers believe that the payment is due 30 days after receiving the invoice—hence the need to get the invoice out quickly. TERMS Customers that don’t qualify for open-account terms, either because their credit history doesn’t warrant it, because their payment history is poor, or because they have not offered sufficient financial information or references can still be sold to. It can be done on a cash-in-advance (CIA) basis, a secured basis, or a cash-on-delivery (COD) basis. Cash in advance is preferable to COD because, as some companies have learned the hard way, COD has its pitfalls. Specifically: The person needed to sign the check may not be available when the driver shows up with the goods. No check is available when the goods are delivered. The customer changes its mind and does not offer payment when goods are delivered. The customer puts a stop payment on the check after it has accepted the goods. The check bounces after the goods have been delivered. The driver forgets to pick up the check when he delivers the goods. Despite its drawbacks, COD is a viable option, especially when the amount of money is not large. DUE DATE As indicated above, customers generally start the clock ticking when the invoices arrive in their office. Sometimes they don’t start counting until the invoice arrives in the accounts payable department. One way to get around this issue is to make the due date crystal clear on the invoice. This will not guarantee payment when you think you should get it, but it will eliminate confusion over the correct date. HOW TO MAKE THE INVOICE DATE CLEAR There are several ways to make the due date clear. Making the date clear is just the first step in getting paid on time. Several ways to make that date crystal clear to the customer’s accounts payable department are to: Include the due date on the invoice. Don’t leave it up to the customer to calculate the date. They will do the calculation to their benefit, not yours. Include a statement that says “Pay this invoice by...” Bold the due date INFORMATION THAT SHOULD BE INCLUDED ON INVOICES The following information should be included on invoices: Addressing: correct address, company, department, contact person Description of delivery, product/services, quantities, delivery location and date Clear specification of the amount, including possible supplements Reference or purchase order number of the other party Order date Person/department who did the ordering Clear statement of payment conditions Clear statement of the desired method of payment Name and direct number of the credit manager responsible OTHER INVOICE TIPS 1. Don’t print invoices on odd-colored paper. Many companies image invoices and you want to ensure that your invoices are easy to read. 2. Don’t print invoices on odd-sized paper. Also, make sure the invoice is of decent size. 3. Make sure the printing on the invoice is clear and legible. Get rid of those old dot matrix printers. 4. Make sure the information on the invoice is clear and precise. 5. Include contact information so customers may contact the appropriate person if there is a problem. 6. Make the due date very clear. 7. While it is a good idea to review large dollar invoices for accuracy before sending to the customer, realize that you may be cutting into the discount period if early payment discounts are offered. ARE YOUR INVOICES THE CAUSE OF YOUR COLLECTION WOES? After taking a long hard look at their invoices, a number of credit professionals have discovered that part of their collection problems were self-inflicted. By making sure that the invoice leaves nothing to the discretion or imagination of the customer, these credit professionals were able to plug some of their collection leaks. Credit professionals can take one of their invoices and pretend to be on the other side of the fence. Is the due date spelled out clearly, or is it left up to the customer to calculate it? If there are two ways to interpret the due date, you can be guaranteed that you will calculate it one way and your customer the other. Don’t give your customer this opportunity. Print the due date on the invoice. The same goes for the amount due. Do you leave it up to the customer to calculate the discount? Make it simple for them. State that x amount is due if the invoice is paid before date 1 and y amount if paid after. Also make sure the invoice is clear and the customer can find the due date and amount due very easily ELECTRONIC BILLING Electronic invoicing is the delivery of invoices, most likely over the Internet, to a customer’s accounts payable department in electronic format. No paper is received—although the invoice can be printed at any time—and the accounts payable department can then forward the invoice, via e-mail, to whoever needs to approve it. The information is then also available, without further keying, to be housed on a network for data retrieval. If it is combined with electronic payments, the information is then forwarded back (without rekeying!) to the vendor. WHY IS ELECTRONIC INVOICING ATTRACTIVE? In addition to the elimination of mountains of paper, accounts receivable professionals like electronic invoicing because: It eliminates mistakes due to rekeyed information. There are currently fears about the mail. It makes the workflow to route invoices for approval a no-brainer. It reduces costs. It makes it difficult, if not impossible, for others to blame the mail for their own shortcomings in processing paper. SUMMARY Billing is an important function that affects the bottom line. If done as efficiently as possible, collections will come in faster increasing investment income or decreasing borrowing expenses. It is a function that is often overlooked when companies are looking for ways to become more efficient. Thus, by making recommendations for change in this area, credit professionals can make a difference. As companies continue to look for ways to cut costs and become more efficient, electronic billing will become a more common tool in corporate America. Those who understand what is involved will be well armed to advise their companies. THE THIRD STEP: COLLECTING THE MONEY If customers paid what they owe when it was due, there would be no collection jobs. However, as those involved in the field are well aware, not only are companies not paying their bills on time, there is a growing trend toward paying them later and later. Thus, the need for collectors with good skills is stronger than ever. There are a wide variety of approaches that can be taken to collect money and collect it faster. The phone is the approach that many deem the most successful for generating payments. GENERAL ADVICE Many accounts receivables professionals believe that the collection process begins when the credit application is first taken. By spelling out in the credit application the terms of sale and any penalties that may accrue due to late payment, accounts receivables professionals are laying the groundwork for their collection efforts. While there are many different ways to go about collecting, some of the suggestions fall under the classification of general as they apply to more than one area. COLLECTION TIPS Become best friends with the accounts payable manager. Begin follow-up efforts earlier. Educate your customers. Make sure they know what your payment terms are and when you expect to be paid. Focus on largest accounts and get them to pay close to terms without letting the smaller accounts get completely out of hand. Follow-up, follow-up, follow-up. Use frequent and persistent phone calls to follow up on late payments. Have a well-documented sales agreement defining payment expectations. Have collectors keep detailed notes of all promises made and follow up with customers the moment a promise is broken. COLLECTION TIPS Make sure that your invoices are correct the first time they are printed. With accurate data, your customer will not have to waste valuable collection time trying to correct the invoice. Notify both the customer and the salesperson the minute an account is put on credit hold. Personal contact in a non offensive manner works well. Friendly reminders keep the communication channels open. Put some muscle behind your calls. If the customer doesn’t do as it promised, follow up with the agreed-upon action. This will let them know in the future that you will act if they don’t perform. Remember to say thank you. Resolve all disputed issues before the due date of the invoice. COLLECTION TIPS Support the customers’ accounts payable staff in their efforts to resolve problems and discrepancies. Train the customers from the inception of the relationship. Explain due dates and collection policies to new customers as soon as the first payment becomes one day past due. Treat all people with respect. The customers do not look forward to the collections call, and letting them know their business is appreciated is a good way to start the conversation. With new accounts, especially if significant amounts are involved, make it clear that prompt payment is expected. USING E-MAIL TO ENHANCE COLLECTION E-mail is a wonderful way to communicate with others. If used judiciously, it can work wonders. Many people, myself included, automatically delete what they view as junk e- mail. Be aware that using $$$ in the subject field is likely to get your message dumped in the junk e-mail folder. E-mail provides an opportunity not available in other collection techniques—the subject field. Use that opening to catch your customers’ attention. However, don’t write something that might make the recipient think the message is junk. COLLECTION TIPS: E- MAIL Send a follow-up e-mail including copies of the invoice or statements negating the requests for additional documentation. Try sending reminder notices via e-mail if you have an address. When sending an e-mail, try and develop straight forward phrase for the subject field. You want the recipient to open the message, not delete it. PHONING FOR DOLLARS Many collection professionals believe that the phone is the best way to collect. Dialing for dollars is the way most companies chase their delinquent customers. Obviously, good phone etiquette is required. Some guidelines for making effective collection calls are: Prepare before the call. Have all the facts in hand before you dial the phone. Before making the call, review past collection history and promises—Is there a trend? Is it negative? Does the customer have a history of promising anything just to get the collector off the phone? If so, be prepared when the customer makes a seemingly positive promise. Make sure you get the correct person on the phone before going into your collection spiel. There is no reason to waste precious time with someone who cannot help you solve your collection issue. PHONING FOR DOLLARS Identify yourself and the reason for your call immediately. Once you have the right person, get to the point. Don’t do all the talking. When you’ve stated your case, stop. Wait for the customer to respond—“the pregnant pause.” If there is silence, so be it. Don’t rush in to fill it as many are apt to do whenever there is a lull in the conversation. Ask open-ended questions. Keep notes of all promises made and follow up immediately if they are broken. Let the customers know that they cannot get rid of you easily. Listen. Research and resolve all disputes quickly. Sometimes customers use minor discrepancies to avoid paying a large invoice. Always ask for payment in full. PHONING FOR DOLLARS Confirm all agreements made during the phone call before hanging up. By doing this, you ensure that the customer is on the same page. Document everything meticulously. COLLECTION TIPS FROM THE FIELD: PHONE Call as soon as the payment becomes past due and then follow up with additional phone calls every three or four days until the payment is received. Call before the invoice is due to let the customer know that the account is being watched and the payment is expected. At this time, you can also inquire about any problems that will delay payment. Call customers a few days before the due date to make sure they have all the information they need to make the payment. Discrepancies and disputes can be resolved at this time. Call customers who are known problems early in the process and verify that the invoice was received and that there are no problems that will delay payment. Develop a strategy for calling late-paying customers. Stick to it and meticulously follow up on all promises made. COLLECTION TIPS FROM THE FIELD: PHONE Have an organized collection process of telephone calling with an organized and timely follow-up on all commitments made. Keep a list of your worst offenders. Start calling them a week earlier than you usually do. Make a customer service call on the thirtieth day to make sure everything is all right and there are no unresolved disputes. Call customers with the largest outstanding balances first, rather than going after the oldest account that may have a small balance. Customers with balances that are very much past due should be cut off— even if the balance is small. When payment arrangements are made, call on the day the payment is due, not several days later. Be firm in a customer service fashion when making your collections calls. GETTING THE SALES FORCE TO HELP WITH THE COLLECTION EFFORTS Even though most salespeople are loath to assist in collection efforts, some do and some do quite successfully. Often, the level of their success depends on how closely their compensation is tied to the collection efforts and accounts receivable aging. COLLECTION TIPS: SALES Set up a periodic meeting with the head of the sales department to discuss problem accounts and collection difficulties. Talk to the sales force and make sure all members understand that it is unacceptable to tell any customer that it is okay to pay late. Train the sales staff to make collection calls. When you are forced to put a customer on credit hold because of nonpayment, inform the appropriate salesperson and have that person apply a bit of not-so-subtle pressure. Have the salesperson place a courtesy call to the purchasing agent at that company and notify him of the credit hold. Then sit back and watch the sparks fly. Withhold salespeople’s commissions until payments are received. This provides the sales force with the necessary incentive to help with collection activity. WHEN ALL ELSE FAILS: COLLECTION AGENCIES No matter how competent the collection professional, eventually all will end up with a customer that simply will not pay. When that happens most turn to a collection agency. But, which one? There are so many. The following is a list of guidelines credit and collection professionals can use to help them get the best results from their collection agencies. When selecting and evaluating an agency, don’t focus entirely on the agency’s fees. Low prices may not translate into the highest return for your company. Evaluate the total dollars returned to your company after the agency’s fees. Be wary of fees that are much lower than the rest of the industries. Agencies that offer low fees will sometimes only make a cursory effort to collect leaving the really difficult accounts for someone else. WHEN ALL ELSE FAILS: COLLECTION AGENCIES Use care in selecting your agencies. Check references. When checking references, ask: If the reference would use the agency again How long the reference party has been using the agency The party to rate the agency on a scale of one to ten, recognizing that few people will give the very top rating to anyone Ask all potential agencies how long they have been in business. While all new businesses need to start somewhere, your company does not need to be at the head of this line. Turn your accounts over to the agency while there is still a chance of collecting. Many companies are reluctant to turn accounts over, either for fear of alienating a customer or not wishing to ay the agency fee. When they finally turn the account over, it is no longer collectable. Many companies don’t turn over their accounts until they are six months past due. This makes it very difficult for the agency. SUMMARY It is important to remember that very few companies actually collect every dollar they bill. In fact, some professionals believe that if there are no bad debt write-offs, the company has too stringent a credit policy and is not optimizing its sales or profits. This does not mean to imply that credit should be granted to all that show up. However, it does mean that, especially for a company with wide margins, an occasional write-off is not the end of the world.