GUARANTEED TIPS FOR REDUCING
YEAR-END RECEIVABLES
By William R. Hill
(2000)

For those of us in the business of providing goods and services in the (sometimes vain) hope of eventually receiving payment, the following strategies are guaranteed to reduce your collection efforts on past-due accounts. 

 1. Accountability.  Someone has to be in charge of each account to make sure that: (a) timely payment is made by the customer, and (b) customers who are credit risks do not continue to receive goods and services without payment.  Commissioned sales personnel are not in the best position to assume this role, as occasionally their motivations will be more directed towards moving the product/services rather than tightening credit terms on customers who present a risk of non-payment.

 2. Follow-up.  Don't let past due accounts continue to age without progressively more emphatic action.  Start with friendly calls from your credit/collection personnel to the customer's accounts payable department.  Those calls should not terminate without a commitment to pay and a firm deadline for payment.  Then if the deadline is missed, the next call should be to management personnel.  Again, the call should not be terminated without receiving a firm commitment to pay and a firm deadline.  If this deadline is also missed, the customer at a minimum should be placed immediately on a C.O.D. basis and formal collection efforts should commence.  Those efforts can range from computer generated dunning letters to the retaining of counsel to attempt collection through legal process.  A word of warning about collection agencies:  be careful whom you hire!  Several recent jury verdicts have made rich men out of deadbeats who refused to pay their legitimate debts, all because of over-enthusiastic actions by collection companies.  To make matters worse, the juries have held that the creditor can be responsible for the actions of the collection from where the relationship between the creditor and collector is that of principal/agent.

 3. Cash-Is-King.  As much as possible, do business through cash payment or immediate receipt of cash equivalents.  Letters of credit, if carefully drawn, are usually as good as cash.  Accepting payment by credit card, although it involves transaction costs, is a good way to avoid A/R problems, especially with new customers.  Security agreements, field warehouse agreements, personal guarantees, and escrow agreements are additional ways to help ensure payment for goods and services provided. 

 4. Get Your Invoice To The Top Of The Customer's Payables Pile.  Do this by including in your written contracts of sale favorable terms for early payment, coupled with painful terms for late payment.  Typical provisions are 2% discounts for payment within ten days and penalties of 1.5% per month for payments made after thirty days.  As between your invoice and that of another creditor, yours is likely to be paid first if the customer receives a financial reward for paying you immediately and/or a disincentive for late payment.  Keep in mind, however, that suppliers and providers of services cannot unilaterally impose terms on customers.  Written agreements between buyer and seller are required before late penalties will be enforced.  Additional contractual terms that make collection easier (both for your accounts receivable department and your attorneys if legal process is necessary) are attorneys' fees provisions; forum selection clauses; choice of law; and, in certain situations, mandatory arbitration. 

 5. Watch Out For Preference Payments Under Federal Bankruptcy Law.  The ability of a bankruptcy trustee to avoid preference payments under the Bankruptcy Code is often a surprise to in-house credit and collections departments.  In general, the trustee in bankruptcy can avoid payments made on past-due accounts within ninety (90) days of the date of the bankruptcy filing.  There are, however, several important exceptions to the trustee's avoidance powers, which are beyond the scope of this article.  The key to keeping monies paid by customers teetering on the edge of bankruptcy is advance planning.  If in-house personnel lack expertise in this area, outside counsel should be consulted. 

If you haven't already done so, implementing these five simple tips will almost certainly reduce your end of the year collection problems and result in lower receivables and fewer uncollectible accounts.

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