By David A. Zobel
If you are in the business of selling something, whether it is materials, labor, services, or all of the above, chances are at some point your company will run into a situation where one or more of your customers fails to pay a bill.
Depending on industry custom or specific arrangement with a customer, an invoice may go unpaid for 30 or 60 days without much concern. However, when an invoice goes unpaid more than 90 or 120 days without agreement or explanation, the likelihood of payment of that invoice steadily decreases with time.
Aging account receivables result from a whole host of reasons. There are also varying responses to the problem. Here are a few tips to help address aging account receivables and hopefully help you get paid.
- Don’t Procrastinate – Deal with the Problem
One of the most common responses I’ve seen to aging account receivables is for the client to simply ignore the problem – even during the client’s own financial hardships. This will not fix the problem and will only make it worse. From a legal perspective, keep in mind that the remedies available to you for collection are governed by deadlines and time limits – some of which, like mechanics lien rights, can expire just a few months after your last delivery or work for the customer.
Acting quickly on unpaid invoices will help ensure you are able to take advantage of all available rights under the law or your agreement. From a practical perspective, you will also want to keep in mind the old saying “Out of sight, out of mind.” Keeping an invoice or statement in front of your customer will help keep the issue current and also convey to the customer you are committed to seeking payment.
- Double-check Your Paperwork
The next tip concerns your records: go back and double-check the details.
- Are you sending the invoice to the current address of your customer? Go back and check your purchase order, contract, and/or correspondence from the customer to ensure a typo did not result when the information was logged into your computer.
- With large and sophisticated customers, check the purchase order and/or terms and conditions to see whether the invoices were to be directed to a specific office.
- Finally, go online and search for the company to see if they’ve moved or if you can find another address.
- Invest in Legal Assistance
I’ve encountered a number of clients that were initially reluctant to engage an attorney due to a misconception that doing so will rack up a sizable legal bill on top of the unpaid invoice. The truth is that engaging an attorney does not necessarily mean significant legal bills. Often the amount collected will far exceed the cost of the attorney’s services – making the engagement a wise investment. Your attorney can help achieve this by working with you to scale up or down the attorney’s actions based upon the specific circumstances of each account receivable.In my practice, I regularly have discussions with clients at the outset to learn about the following:
- What type of underlying business relationship exists between the client and customer which may need to be accounted for (one-off sale or is the client worried about affecting future sales to the customer)?
- Is the client aware of a customer’s financial issues?
- What type of investment does the client want to make?
- What rights and limitations are present which may affect collection?
Based upon these discussions, some clients simply send over spreadsheets demonstrating numerous account receivables and ask for written demands to be sent out for each. Often, a formal letter from our office will elicit cooperation.
For others, some early, limited background research may demonstrate that collection efforts, in general, would be a waste of time and money. In those situations, the research at least resolves lingering uncertainty allowing the client to write off the debt and move on to more productive matters.
Finally, when appropriate, a lawsuit can be filed and hopefully settled should the customer and client reach an agreement to pay all or part of an invoice.
- Develop a Policy
The final tip is to develop a policy for collection.
- Do you have a regular, streamlined procedure indicating when your first invoice is sent out, when a reminder invoice is sent out, what legal deadlines must be observed, and when to contact an attorney?
- How are your customer accounts categorized in your company’s records?
- Does your company pull and review account receivables systemically?
- Are customer purchase orders, agreements, and correspondence retained and cataloged in an easily reviewable manner?
Taking a considerable look at your accounting practices may not solve existing aging account receivables, but it will certainly help address and avoid future ones.