The purpose of your accounts receivable department is to invoice, monitor and collect payments for goods and services sold by your business. Your "accounts receivable" refers to any amounts due from clients or billings from any business transactions. While it seems simple enough, A/R can become quite complex when your clients aren't paying on time, your days sales outstanding (DSO) is too high or your accounts receivable turnover ratio continues to decrease.
To begin to understand why your business needs an accounts receivable collections policy, you need to know the effectiveness of your A/R department (yes, even when you're a department of one). When you know where you begin, you will be able to create goals to be more successful in your business cash flow.
Can you answer these questions:
If you're starting or expanding an accounts receivable department, it's helpful to understand the roles and responsibilities of the A/R job. Defining these specifics is helpful so that the department becomes a well-oiled machine. Everyone knows their responsibilities and works in concert with others so that accounts are collected quickly and efficiently.
Accounts often go unpaid or delinquent because the proper information isn't included on invoices. Invoicing should be done with regularity and consistency. Your clients should know exactly what they're paying for, when payment is due, how they can pay and more. Your accounts receivable department should also know to run an aging report regularly to determine which accounts remain unpaid.
Did you know that you can prompt client payments before they're due? Your accounts receivable team also needs to have a documented process for following up. Your A/R collections representatives should follow up on every delinquent account in the same consistent way. This process should include:
...the answers to all of these questions and more. If you're unhappy with the effectiveness of your accounts receivable department, you need an accounts receivable collections policy. The policy will not only create a more consistent process for A/R, but your business will collect more of what's owed to you. Click the green button above to download an editable sample template for your business. Take the time to determine what works best for your business and then stick to your new policy. You may need to make adjustments along the way so continue to optimize it to suit your needs. Good luck!