Cash Flow And Collection Problems: Fixing Common Accounting Mistakes

Cash Flow And Collection Problems: Fixing Common Accounting Mistakes

It would be wonderful if every customer simply paid his or her invoices upon receipt. Unfortunately, the reality is that in most businesses, it’s imperative to diligently monitor and collect on past due accounts. Here are 12 of the most common mistakes that greatly impact your cash flow and lead to serious collection problems.

1. Not having a credit policy. Many small and medium-size businesses do not take the time to create and implement a credit policy that dictates the required payment terms that need to be conveyed to your customer and the call to action in the event that accounts become past due. In essence, a comprehensive credit policy is a company’s road map that will greatly supports its ability to increase its cash flow and minimize the risk of selling on credit.

 2. Not having a system to organize your receivables. There is a wide range of reasonable accounting software packages that are easy to implement and use, while also fitting every kind of company’s unique billing situation. If your company has not implemented the kind of system that can produce a report of your current 1-30, 31-60, 61-90 and over 90-day accounts, then you can’t even begin to take the appropriate action on past due customers. Having an automated accounting program that can give you a clear lay of the land of your receivables should go without saying.

 3. Sending invoices late. Some companies, especially in consulting and other professional service fields, have a tendency to send their invoices significantly after the services were performed. When companies send out invoices on a late schedule, the customer may not only forget about the services that were provided, but also has been conveyed a message that they can take their time in paying the invoice. The general rule is that you should try to get an invoice to your customer within one week.

4. Not updating customer information regularly. Far too many payments go uncollected because the invoices went to the wrong address or the business was sold and someone new is handling payables. These kinds of errors should be easy to correct by establishing an annual confirmation process for updating all contact information.

5. Not invoicing as per the client’s requirements. Many companies have very strict requirements pertaining to how the invoice needs to be formatted and the kind of information required. Any deviation can cause your invoice to be kicked out of the payment queue and put aside for “special handling.” Other companies have an accounts payable assembly line in place, in which an invoice that doesn’t meet their submission conditions can again be held up until the person in charge can deal with it. This is especially true when it comes to large corporations. It’s always imperative to confirm their payable requirements, so that your company can be paid smoothly.

 6. Making payment application errors. Whether payment is made by check, online or wire, payment application errors are one of the most prevalent errors. They not only cause accounts to be misclassified as delinquent, but can also lead to a number of other problems. For example, when the wrong account has been incorrectly debited and the wrong account’s payment is received, it is sometimes misinterpreted to be a payment in advance. In addition, when a customer is contacted for their presumed late payment, but has paid it on time, a feeling of ill will can emerge between the customer and the supplier. Furthermore, a payment application error can also become a legal dispute when notification of an account being paid was sent to the wrong customer, and is subsequently used as proof of payment down the road.

 7. Failing to apply payments promptly. In line with number 6, checks that are not generally deposited within six months, either by accident or through poor internal processing, may not be honored at your bank. In addition to misclassifying the customer’s account as delinquent, the inability to deposit the check after so many months may impact the customer’s good will in reissuing the check.

8. Not monitoring and acting upon past due accounts. Simply knowing that there are past due accounts, but not having the personnel in place to actually take follow-up action on them, has no meaning. As accounts become past due, whether it’s the accounting staff or having a full-time in-house collector, a qualified individual has to be designated to make that call and confirm with the customer as to when payment will be forthcoming.

 9. Not resolving disputes timely. No company is infallible, and from time to time, there will be issues regarding the products and services sold. This will prevent the invoices from being paid. It is absolutely imperative to understand what the problem is and then try and rectify the situation as quickly as possible. Many times, companies will sit on customer disputes either due to a lack of manpower or a lack of urgency on the matter. The longer the dispute remains unresolved, the harder it will be to eventually collect the underlying invoice. As an important point in resolving a dispute, try to collect on any portion of an invoice that is not in dispute.

 10. Accepting the runaround. It’s very easy in today’s business for people to avoid calls, emails and other means of communications. Don’t allow a company to give you the runaround. Be persistent, and even if you have to go all the way up to the president of the company, reach the person with whom you need to discuss an outstanding payment.

 11. Not locking in a payment date. This is so important for any successful collection. Promises to “pay soon,” “after I get a chance to speak with the boss” or “as soon as I get payment from my customer” are very vague reasons and leave the door open to being unpaid. Make sure you get a date for when payment will be sent, and depending upon the account, get it in writing.

12. Not being sufficiently aggressive in your collection attempts. Your credit policy should include a general guideline of steps to take, in the event that promises for payment continue to be broken or unreasonably drawn out. At some point, when the customer has demonstrated a complete lack of faith and good will, it’s best to place the account with a debt collection agency or collection attorney to continue with a more aggressive collection effort.

No one wants to have money issues or the stress that comes with a lack of a timely payment. Know and implement these 12 steps of action to help you avoid this hassle and improve the quality of your business operations.