Policies & Procedures for Accounts Receivable

Accounts receivable are a necessary evil of business today — it seems that everyone expects credit as part of the terms of a sale. You can do more business by extending credit to your customers, but without the correct management and processes in place, you can fail to collect the money that you're due. Clear policies and procedures are necessary for effective accounts-receivable management.

To manage your accounts receivable correctly, you must start with a policy concerning what type of account receives credit approval within your business. You may choose to perform a credit check on any potential business that's asking for a credit account and require a certain credit score to open an account. It's also prudent to make the length of time a person has been in business part of the underwriting process if you're selling to businesses. A firm credit limit is sensible on any account, and you may choose to limit new accounts to a lower amount.

To prevent the risk of financial loss due to nonpaying customers, you should have a procedure to monitor the aging of all of your accounts receivable. Aging simply looks at how old your accounts are, usually in the number of days. It's common to measure the age of accounts in 30-day increments, but you can use shorter lengths of time as well. If certain accounts are always exceeding your terms for payment, you may need to look at changing your credit terms for those accounts.

You must have a policy that you follow for collecting delinquent accounts, and you must be willing to adhere to it without exception. It may work best for your business to call any account that's over 30 days old, with calls and letters becoming more frequent as the account gets older. You should consider using more aggressive techniques after an account becomes older, such as turning an account over to a collections agency or filing a suit in small claims court. Be sure to implement the collection policies consistently.

Certain business owners may say that your business never has a collections problem — it only has a sales problem. This means that if your customers, or a certain group of customers, is having problems paying their bills, you may need to evaluate your sales approach with this group. You may need to restrict a certain segment of your customers from credit sales or require larger down payments. Never get so caught up in the desire to make a sale that you neglect your established procedures for credit sales. You put these procedures in place for a reason.