Compliance Essential for Effective Accounts Receivable Management

The Accounts Receivable Network (TARN) offers the most comprehensive, specialized resource available for F&A professionals responsible for accounts receivable management, by providing – in one convenient, online location – integrated solutions for AR strategy, technology, people and processes.

The essential function of every accounts receivable department is collecting payments owed the company. Receiving money due, in full and on time, for goods or services provided is crucial to the long-term success of every business. Late payments and bad debts can negatively affect cash flow and diminish a firm’s liquidity. According to some estimates, one out of five small business failures is due primarily to bad debt.

An effective collections plan can reduce business-busting delinquencies. The plan should comprise a regularly updated system that flags overdue accounts, a set of internal procedures to handle slow-paying customers, and a process by which managers receive regular updates that list slow-paying customers. As with any other business process, the collections plan should be regularly reviewed for needed improvements.

It’s important to act quickly to pursue overdue accounts. The longer a debt remains unpaid, the more likely its ultimate delinquency becomes. Any account more than 60 days past due requires immediate attention. According to the Commercial Collection Agency Association, nearly 27 percent of accounts that are three months past due, 44 percent of accounts six months late, and almost 75 percent of accounts 12 months overdue will never be collected.

These sobering probabilities point to the importance of acting quickly and effectively in pursuing overdue debts. But the accounts receivable department must conduct collections activity in accordance with all pertinent federal and state laws, or it may face financial consequences that cost the business even more than bad debts would. Government agencies can levy significant non-compliance fines, and debtors who sue for libel or harassment can sometimes collect more in damages than they owed in the first place. In seeking payment on delinquent accounts, accounts receivable collectors must comply with federal laws governing collection practices including the Federal Trade Commission Act and the Fair Debt Collection Practices Act. The Federal Trade Commission (FTC) is the federal government agency that oversees compliance with collections laws. The FTC site offers pamphlets and other resources that can help guide a company’s compliance efforts (See www.ftc.gov).

Many states also have their own laws governing collections. A local attorney should be able to clarify any pertinent regulations. Trade associations may also be able to provide some basic guidance.

Some common-sense best practices will not only help prevent late payments and bad debts in the first place, but will stand the business in better stead to collect legally and effectively if such activity becomes necessary.

First of all, the company should perform credit checks on new customers. Once a customer has been approved for credit, the company should insist on an agreement in writing. In the event of a future collection dispute, a signed agreement will make the company’s case much stronger. A purchase order or contract should detail how much a client will owe and when it will be due. Any changes should be reflected in writing.

Proper invoicing is vital. Many payment delays occur because of simple errors, such as sending an invoice to the wrong person. It is particularly important to explain terms clearly. Terms outline how the company expects to receive payment, and what interest or penalties will be charged for late payment. These terms must be stated clearly to limit disagreements. The accounts receivable department cannot demand that these terms be met if customers have not been informed of them in writing beforehand.

A process for handling customer satisfaction problems should keep instances of non-payment due to customer dissatisfaction to a minimum and protect the company’s interests in collecting payment for goods or services rendered.

These policies should help reduce payment delays and delinquencies, but in all likelihood, such problems will occur at times. In these situations, the accounts receivable department will have to take a more aggressive approach to pursue payment, but one that is fully compliant with collections law.