Accounting Basics on Collecting Past Due Accounts
If your business invoices customers for goods or services after the goods or services have been delivered, you have to maintain accurate, timely accounts receivable accounting records to keep up with billing and collections. One of the more frustrating aspects of maintaining a billing system is dealing with past due accounts.
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Perform Daily Updates
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The necessary first step in collecting past due accounts is identifying them. Without revenue collections, you have no cash flow to pay your own business expenses, so maintaining an accurate, up-to-date accounts receivable accounting system should be a priority. Record all invoices to the accounts receivable accounting system with the invoice issued date so that you can easily identify how long the invoice has been outstanding. All invoices sent to customers should contain a due date that is easily located on the document. Record all receipts for invoices daily, even if you don't make a bank deposit daily. This prevents you from accidentally calling to collect on an account that has been paid.
Initial Collection Contact
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Your initial contact to the customer should be the first day after the invoice is late. If you let things slide for a week or two, your customers may decide that slow-paying is a practice that is acceptable to you. Contacting customers immediately following the due date lets the customer know that you closely monitor your accounts receivable. Ask the customer for a specific date when you can expect payment.
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Follow-up Collection Contact
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If the customer promises you payment by a certain date, and you accept the payment arrangements, make a note on the customer's accounts receivable file with the new due date. Create a reminder to check the customer's account on that due date to ensure you've received payment. If you have not received payment, contact the customer immediately. Continue to contact the customer at least once a week until collection is made or written off.
Restrict Customer's Line of Credit
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If a customer is behind on account payments, restrict the line of credit offered to the customer until the customer brings the accounts receivable balance up to date, and you are reasonably sure the customer has the ability to pay going forward.
Uncollectible Accounts
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Every business needs a bad debt policy. Depending on your type of business, you may elect to write off bad debts after 60 days or after six months. If the customer files bankruptcy or closes the business, you should write off the balance at the point you believe it is not collectible, even if the outstanding balance has not reached your bad debt write-off date. Writing off bad debt is especially important when using the accrual accounting method, because then you're not reporting income for your business for which you do not expect to receive payment. Writing off a bad debt for accounting purposes does not mean you have to stop attempts to collect on an account. As long as you feel the account can be collected, you should continue efforts to collect.
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