Receivables are monies owed to your company. If you give your customers credit – time after the sale to pay you – then you have receivables. (These do not include notes, loans, or other debt which is secured by a promissory note.) Typically, the product or service is delivered, then an invoice is sent to the customer. Stipulated on the invoice are the payment terms (e.g. Net 30: or payment is due 30 days from the date of the invoice).
Collecting receivables has been known to give owners nightmares:
- You don’t want to call the customer because it’s embarrassing and difficult for both of you.
- You are concerned the call may make the customer angry.
- What will you say if the customer tells you – again – that the check is in the mail?
If you deal with large corporations and governments you are likely aware that some have decided to award themselves 60, 90, even 120 days to pay invoices. Try offering discounts for early payment e.g. “Net 30, 1%” meaning they may deduct 1% of the total if they pay in 30 days), but determine in advance what you will do if they take the discount and pay in 90 days anyway.
This is your money tied up by customers. It represents improvements you can’t make, bills you can’t pay and it’s a drag on your cash flow. You need a plan to collect your receivables.
Maintaining a current record of receivables by hand is a time consuming proposition. An Aged Receivable Report is attached below and we recommend that if your accounting system doesn’t create one, you use the template to help you keep a current accounting of monies owed to you. It is the first step in successful collection. If a customer routinely pays you at 45 days without pushback, s/he will slip to 60 days soon.
So you’ve aged your receivables, evaluated each customer and made all the requisite phone calls to try to collect your money, but there are still holdouts. You have some options, such as Factoring or turning the account over to a collection agency or an attorney.
Collection: the companies who specialize in this service will contract with your company for either a fee or a percentage of the collected funds, typically between 20% and 50%. Contracts differ as do the methods used.
Factoring Receivables or Selling the Debt is a common method of collecting your receivables early. Many companies and banks offer this service wherein the Factor pays you a percentage of the Receivables and takes over collection of the debt. The age of the Receivable and the creditworthiness of the debtor will determine how much you are paid. It is wise to have your attorney look at the contract between your business and the Factor as different jurisdictions may treat the transaction differently and you could be at risk for any debts the Factor is unable to collect.
In either instance, the collection company or Factor is very motivated to get your customers to pay by whatever means necessary. You may wish to consider the impact on future business before turning a customer over to either.
History proves you are not likely to collect all your debts. Some of your customers will go out of business, refuse for one reason or another, or simply not pay. There will be a line on your balance sheet under Receivables which says something like “allowance for Doubtful Accounts or “Allowance for Bad Debt”. You may deduce the probable amount of bad debt either by actual assessment of each receivable or by applying a percentage to the whole (e.g. 1.5% of total receivables).
Receivables are an Asset on your Balance Sheet.
Below is a simple aged receivable report to help to stay on top of who owes what and how long they are taking to pay. It must be updated regularly to be useful.