The process of collecting what's due from customers can go by several names. Accounts receivable, receivables, A/R, accounts receivable collections, debt collections, and more.
(Not to be confused with accounts payable, which is a different part altogether.)
Many of these terms are not interchangeable but actually define different levels or areas of the process of collecting payments.
What's the difference between accounts receivable and collections?
The Process of Client Payments Collection
The best way to explain the difference is to examine the entire process of collecting client payments. Let's start by examining why clients would owe your business money.
Sales: When your business makes a sale to a client or customer, they will likely make payments over time, pay some up front and the balance at the end, or your business will issue them credit to pay later. Because they haven't paid the full amount owed yet, your business is expecting to receive payment. The other business is expected to pay.
Accounts Payable -> Accounts Receivable: Your client's accounts payable department is responsible for paying the receivables to your accounts receivable department.
Accounts receivable or A/R is expected to receive payments in a timely manner, prior to or on the due date listed on the invoice or contract agreement. The A/R department will likely implement different procedures to ensure payment is received on time, such as:
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Setting payment terms based on the business' credit and other credit management policies
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Invoicing regularly and including necessary information for payment
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Tracking invoice aging to determine if some client payments are trending late
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Sending payment reminders before or after payment is due
When Does Accounts Receivable Become Debt Collections?
Up to this point in the process, the process of collecting is still being handled by the accounts receivable department. Some late invoices, especially if they're small value, may be put aside for follow-up later. Others will need immediate attention.
First-party collections, generally handled by a part of the A/R department, will take over from accounts receivable to follow up with the client to determine why the invoice remains unpaid. At this stage in the process, they will attempt to contact and negotiate payment with the customer. If payment is still not received or contact has been unsuccessful within a certain amount of time, the account may be escalated to a third-party debt collection agency.
Other reasons to turn to third-party debt collections include:
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If the invoice is 45 to 90 days past due and no contact has been made
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If the invoice is 90 days past due
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If the client is non-responsive or unwilling to pay
Accounts receivable is involved with collecting payment; however, A/R management involves so much more. Collections, however, are singularly focused on one end goal - collecting payment from customers who haven't paid on time for a number of reasons.
If your business needs help with accounts receivable best practices, debt collections, or legal advice, Enterprise Recovery LLC can help. Reach out to us to get your payments back on track.
