One of the top issues facing many small business owners is debt collection. When customers and business partners don’t remit payment on time and in full, this scenario can wreak havoc with your company’s cash flow situation. 

When you’re forced to pursue unpaid debts, it might even cost you business resources and time beyond the value of the initial payment owed. Fortunately, there are a few proactive things your business can do to reduce the need for debt collection and improve your efforts when you do have to pursue unpaid debts. Here are some best practices for collecting A/R that can help you increase your bottom line results:

1. Create a Payment Policy

It’s essential that your company protect its interests with systems, contracts, and policies that will allow you to collect unpaid debts. Verbal agreements and handshake deals will be tough to enforce. 

Create a standard contract that you present to business partners outlining your payment terms as the penalties for late or non-payment. Have internal systems in place that will allow you to effectively track and pursue delinquent payments. 

2. Accurately Record Your Books

Detailed and accurate accounting will help your business quickly uncover which accounts are behind on their payments so that you can deal with them. You should be transparent with clients, letting them know their account standing by providing them with accurate and timely invoices. 

3. Act Swiftly on Unpaid Debts

It might be tempting to be more lenient with some customers because you are concerned about losing business. But you need the cash flow to continue operations, and customers that take advantage of your goodwill are likely to push the limits. 

It’s better to act consistently and swiftly when a customer is delinquent with their account. Contact them and let them know they have a past due bill. Give them the specifics as well as the expectation for payment, plus any interest or late fees owed. 

4. Stay Within the Law

While you want to have a firm collections policy, it’s against the law to intimidate, harass, or threaten customers who can’t make a payment. You should also avoid threatening any action that you don’t intend to take or can’t legally execute. 

As the original creditor, you will be regulated by state law. Also, the Fair Debt Collection Practices Act (FDCPA) applies to collection agencies, law firms, and other third parties that collect debts on a company’s behalf. 

5. Document Your Efforts

As you work to collect A/R debts, be sure to document your efforts. You should keep copies of your emails, letters, and a record of any meetings and phone calls with the customer. You can use this documentation should you go to court. 

6. Remain Flexible Within Reason

Unfortunately, some customers might experience their own cash flow issues and simply be unable to repay your debt in full. In some cases, you might wish to work out a payment plan or settle the debt for a percentage of the total as a one-off payment. Whichever option you choose, document your agreement and have the customer sign an acknowledgment with the payment. 

7. Use the Resources Available

If your collection efforts aren’t bearing fruit, the most efficient means available to you might be to take them to court. The threshold varies by state, but in Wisconsin, a business can take someone to court for an unpaid debt in the amount of $5,000 or less. 

At Nolan Accounting, we work with small business clients throughout Southeast Wisconsin. Our Accountants and CPAs can provide your business with bookkeeping, payroll, accounting, tax preparation, and consulting services to help you improve your business and its bottom-line results. Contact us today to start a conversation about how we can help yours.