In my twenty five years of practicing accounting, a major area that many companies (that have eventually failed) have had significant problems with, is collections and accounts receivables. The old adage that a sale is not a sale until the cash is collected is still true. It is imperative now (and always) to have a policy and procedure in place for dealing with collections and accounts receivables.
The policy and procedure should address; the gathering of relevant facts about the customer you are extending credit to, the setting and monitoring of limits of credit to be extended, and the steps in collecting accounts receivables including the timing of placing the receivable in professional collectors hands.
I encourage you to communicate your policy to all new customers, and to send your policy to any customer that is in arrears on their debts to you. The second old adage that is appropriate is that the squeaky wheel gets fixed first, so take it as your personal responsibility to call/contact customers the day after the due date of your invoice. Do not rely on oft heard excuse, “my industry always pays in 45 (or 60 or ??) days”. This is the time to change. Explain to your customers that you honor your commitments to pay on time and expect them to do likewise. Remember they have negotiated the terms, including the dating of such, and that they have agreed to pay within the negotiated time frame, and the pricing they received reflects payment within that time frame. Interest payments and late fees should be added as additional incentives to take your terms seriously.
For those customers (especially the big elephants that you have to deal with) that ignore your terms or the interest or late fees added on to their account, you should adjust their pricing accordingly. If you don’t do this then you are not getting the gross margins you anticipated, and will not have the same profitability you projected.
Good luck and here’s hoping it “all adds up” for you.
(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at Ginnatycpa@aol.com and if it is of general interest, he will address it in future articles)