In business-to-business (B2B) transactions, companies often offer credit to their customers, enabling them to settle payments for goods or services at a later date. When purchases are made on credit, there is always the risk of customers defaulting on their payments. This can have a negative impact on a company's cash flow and overall financial health. That's where accounts receivable (AR) collections come into play. Collections are a vital process for businesses to handle outstanding invoices and ensure prompt payment from their customers. In this article, we will explore what accounts receivable collections are, why they are important, and best practices for effectively managing them.

AR collections refer to the process of collecting payments from customers who have purchased goods and/or services on credit. Collections are a critical part of the credit-to-cash process.

In order to handle cases where payment is late, businesses require defined procedures and staff resources to handle the collections process. The more clearly defined and widely communicated this process is, the better the chance the business has of collecting the debt - and the higher their customer satisfaction scores.

The typical collections process includes the following steps:

1. Overdue invoice is assigned. When an invoice becomes overdue for payment, it is typically assigned to an AR staff member for collection activities.
2. Verify past due amount.  The past due invoice may require some adjustments if there are deductions to account for, product returns, marketing promotions, or special incentives that were offered.
3. Issue dunning letters. Dunning letters are notifications sent to a customer to advise them that an account is past due, and they are usually sent at fixed intervals. Dunning letters are generally printed and sent through the postal service.
4. Call the customer. In addition to dunning letters, phone calls are placed to customers to discuss the reasons for lack of payment.
5. Settle payment arrangements. This may take the form of instant payment over the phone, an extension of the payment deadline, or revised terms for the payment arrangement.
6. Adjust credit limit. Depending on the customer’s payment situation and history with the business, a review of their current credit limit may occur, and adjustments may be made at the credit team’s discretion.
7. Monitor payments under settlement arrangements. In cases where there are special payment plans, businesses need to stay on top of the new arrangements and contact customers as soon as it appears that they will miss a scheduled payment due date. This level of monitoring is vital to keep customers from delaying payments.
8. Refer to a collection agency. Once all other in-house collection techniques have been attempted, many businesses utilise a collection agency. At this point, the customer is typically placed on a credit hold.
9. Initiate legal action. If all other alternatives have failed, a business may authorise its legal team to proceed with a lawsuit against the customer in an attempt to reclaim the debt.
10. Write off the remaining balance. If all collection actions have failed, businesses may write off the overdue amount as bad debt.

The collection of accounts receivable is costly and labour-intensive. However, it is a necessary investment to ensure a healthy cash flow for the business. The success of a structured and diligent collections process can often be the deciding factor between a thriving or a struggling business when you consider the data:

• An account that is 90 days past due has a 69.6% chance of being paid
• An account that is 180 days past due has a 52.1% chance of being paid
• After one year of delinquency, the chance of collecting payment falls to 22.8%

While turning to collections agencies is typically a last resort, businesses may do so to recover their debts. However, these services come at a high cost, ranging from 25%-45% of the total amount owed, with debt collectors only receiving payment when they successfully recover the outstanding debt.

Ideally, all accounts receivable would be collected within the standard timeframe. In reality, this isn't always the case. Businesses need to take proactive measures to remind and encourage customers to follow through with payments in order to ensure that uncollected debts are minimised. It’s crucial for businesses to implement a structured and diligent collections process to avoid financial instability.

Here are five simple strategies for reducing overdue invoices and speeding up customer payments. 

1.     Send electronic invoices and track when it was opened

You can now send invoices electronically to your clients directly inside Quickbooks or other accounting, billing, and invoicing software platforms. It’s fast and cost efficient. Depending on the software, it may include features that allow you to:

1. Track when the recipient opens and views the invoice to ensure that the customer actually received it (rather than it ending up in their junk folder).
2. Communicate with your clients about payments in real time. See tip #4 below.
3. Set automatic reminders before, on, and after the due date to facilitate payment.

2.     Don’t wait to contact customers with overdue payments

As the data above makes clear, the longer an invoice is past due, the less your chances of being paid at all.

Be sure to always get in touch the day the account is overdue. For new clients or clients who often pay late, a reminder email or duplicate e-invoice can help. 

3.     Use outsourced AR specialists or hire your own AR staff

AR is a specialised function that requires specific systems and skills. 

Whether you have your own A/R staff or use an outsourced A/R service, make sure staff are:

• Polite and professional.
• Communicate with customers at appropriate intervals.
• Encourage clients to pay online or over the phone or commit to a payment date. 
• Document all client conversations for history and traceability.

4.     Communicate frequently to speed up payment

There are three main reasons for delayed payment:

• Your customer simply forgot about the invoice.
• Your customer has an issue with the invoice amount, or the product/service provided. Instead of communicating this to you, they just don't pay the invoice. You will only find out if you get in touch.
• Your client is also waiting for payment and is trying to extend credit/preserve cash.

It’s human nature to want to "do the right thing." People will usually pay suppliers who are in touch on a regular basis and ask for payment. Call, text, or email your clients at appropriate intervals.

5.     Make invoice collection and AR management a key performance metric 

Business growth and survival correlate to cash flow and speed of invoice collections. You should not need to scramble for payroll or put off purchasing new equipment because your customers owe you money.

Cash flow is the lifeblood of the business, and you should be able to predict when each customer is likely to pay.

To make accounts receivables a key performance metric:

• Schedule a short meeting once a week dedicated to analysing outstanding debtors.
• Measure "Days sales outstanding" (DSO) and set a target for reducing this key metric. DSO is used to calculate the average collection period.
• Use accounts receivable management software to benchmark your performance.
• Celebrate actually getting paid just as much as you celebrate making a sale!

Collections are a crucial part of a business's credit-to-cash process that involves collecting payments from customers who have purchased goods or services on credit. Failure to collect AR in a timely manner can result in severe financial instability for businesses. In this article, we’ve covered the various steps of the collections process and five simple strategies you can use to effectively manage AR collections. Accounts receivable and cash flow are tied to every business' bottom line. Take control by implementing these five strategies that will help you stay on top of invoices.