In business, balance counts. The success of any business rests on how well its core mandates are balanced against the swing of the overall operating climate. One aspect of this climate that makes up a part of regular business practice is the implementation of accounts receivable. Accounts receivable refer to open and actionable debts that are owed to a company. These debts stem from the acquisition of goods and services by a client that have yet to be paid for.
How Does Accounts Receivable Work?
A company will sometimes provide goods and services to customers on credit. As soon as either one is dispatched, the company will record the transaction as accounts receivable as they await payment.
An example of this in action would be the case of a restaurant supplier. Once they have brought in whatever goods or services that they provide for the restaurants that they work with, and before the restaurant settles the money owed to the supplier, the transaction will be labelled under accounts receivable in the supplier’s balance book.
Creating an accounts receivable line that corresponds to a particular customer denotes that a relationship between the two has been established and a credit line formed. To keep track of a specific entry, the business that is extending the line of credit will draw up an agreement that dictates the period within which the debt must be settled. Some companies even offer discounts to those debtors that settle their accounts earlier than prescribed as incentive.
For the client, the debt will be denoted as accounts payable in their book with the same terms of payment listed for reference. It now falls to them to manage this payment within the given period with consequences for late payment laid out and enforced when if the need arises for such action.
Accounts receivable, despite seeming unresolved, are classified as part of a business’ assets. They can be presented as part of an agreement of sale, or in the instance where a loan application is to be submitted for approval.
What if an Outstanding Account Remains Unpaid?
With terms of payment clearly in place, the business that is owed will send out notices of an outstanding balance to its debtors. These notices typically come in the form of invoices. Once an invoice has been sent, then a clock begins counting down to a payment deadline that has already been agreed upon. These periods vary and can go from 30 days to 90 days.
If it is discovered that a debtor is delinquent, one of the first steps to be taken would be the sending of reminders. These are aimed at ‘nudging’ the customer, in case they have forgotten to settle the debt. Reminders can be sent as frequently as you feel is needed for a certain period before further escalation is considered. The main point of note at this stage is to tread carefully to avoid the sentiment or accusation of harassment.
It is advised that creditors extend a ‘grace period’ of not more than 2 or 3 months to those that are overdue on their payment requirements. It has been observed that the longer it takes to collect an outstanding amount, then the more difficult it becomes to resolve the debt. If in this time, the reminders continue to yield no results, then escalation to actions like debt recovery does become necessary. Getting to this point will necessitate your informing the customers of the action to be taken. When you do so, you may also issue a caveat that allows them a window of opportunity in which they can still settle the account and stop further action.
If you encounter failure to elicit a response from the threat of debt recovery, or if the debt recovery process has been executed without much success as to the establishment of a line of communication, or extension of a positive action, will then lead to seeking legal recourse. More often than not, legal proceedings will compel the debtor to take some action.
All in all, the escalation of overdue accounts has to be balanced very carefully with the needs and requirements of the business as overdue debts affect the working capital cycle of your firm. As you begin the process, contact an experienced debt collection agency that will guide you as you set about recovering overdue debts. Remember to keep the health of your business at the forefront of your mind as you establish and execute an escalation that seeks to recover what is owed to you.