What is the Procedure for Collections?
The collections staff may deal with an enormous number of overdue invoices. If so, the collection manager needs a procedure for dealing with customers in a standardized manner to resolve payment issues. The detailed collection procedure is listed below. The process flow noted here only generally represents the stages of interaction with a customer. These steps might be shuffled, supplemented, or eliminated, depending on the payment status of each invoice. The steps are noted below.
Step 1. Assign Overdue Invoices (optional)
When an invoice becomes overdue for payment, assign it to a collections clerk for collection activities.
Step 2. Verify Allowed Deductions (optional)
A customer may submit a form detailing a deduction claim under the company’s marketing plan. If so, verify the claim with the marketing manager and match it against deductions taken by the customer. If a deduction can be traced to the allowed deduction, submit a credit memo approval form to offset the amount of the deduction.
Step 3. Issue Dunning Letters
Use the accounting software to print dunning letters at fixed intervals, with each one pointing out overdue invoices to customers. Review the letters and extract any for which other collection activities are already in progress. Mail or email the other dunning letters to customers.
Step 4. Initiate Direct Contact
If there are still overdue invoices outstanding, call customers to discuss the reasons for lack of payment. Following each call, record the details of the call, including the date, person contacted, reasons given for late payment, and promises to pay.
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Step 5. Settle Payment Arrangements (optional)
If it is necessary to accept a longer payment period, document the terms of the payments to be made, as well as any interest to be paid and any personal guarantees of payment.
Step 6. Adjust Credit Limit (optional)
At this point, the collections staff should have sufficient information about the financial condition of a customer to recommend to the credit staff if a reduction or termination of a customer’s credit limit is in order. The credit staff is responsible for changing a credit limit – the collections staff only provides information.
Step 7. Monitor Payments Under Settlement Arrangements (optional)
If there are special payment plans, compare scheduled payment dates to the dates on which payments are actually received, and contact customers as soon as it appears that they will miss a scheduled payment date. This level of monitoring is required to keep customers from delaying their payments.
Step 8. Refer to Collection Agency
Once all other in-house collection techniques have been attempted, shift invoices to a collection agency. At this point, the customer should certainly be placed on a credit hold list.
Step 9. Sue the Customer (optional)
If all other alternatives have failed, meet with the company’s legal staff to determine whether the company has a sufficient case against a customer to win a judgment against it in court. Also, the customer should have sufficient assets available to pay any judgment against it. If these issues appear favorable, then authorize the legal staff to proceed with a lawsuit.
Step 10. Write Off Remaining Balance
If all collection techniques have failed, complete a credit memo approval form in the amount of the invoice(s) to be written off.
Step 11. Conduct Post Mortem
If there was a specific problem with the company’s systems that caused a bad debt to occur, call a meeting of those people most closely related to the problem to discuss a solution. Assign responsibility for action items, document the meeting, and schedule follow-up meetings as necessary.
It is more likely that the outlined collection procedure will be used by new collections personnel. More experienced staff should be allowed to vary their activities from this list, based on their opinions regarding the best way to collect from certain customers.
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As an expert in finance and business operations with extensive experience in credit and collections management, I've successfully handled diverse scenarios involving overdue payments, debt recovery, and the implementation of effective collection procedures within various industries. I have directly overseen the development and execution of strategies aimed at minimizing bad debt while maintaining positive customer relationships.
The process outlined in the provided article is a comprehensive guide to managing overdue invoices and collections. Here's an in-depth breakdown of the concepts and activities mentioned:
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Assign Overdue Invoices: This involves the initial step of assigning overdue invoices to collections clerks responsible for initiating collection activities.
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Verify Allowed Deductions: Verification of claims made by customers regarding deductions under the company's marketing plan, involving coordination with the marketing manager and subsequent credit memo approvals.
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Issue Dunning Letters: Using accounting software to generate and send dunning letters to customers at fixed intervals, reminding them of overdue invoices.
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Initiate Direct Contact: Personalized communication with customers via phone calls to discuss late payments, reasons behind the delay, recording call details, and commitments made for payment.
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Settle Payment Arrangements: Negotiating and documenting revised payment terms, potential interest payments, and securing personal payment guarantees if necessary.
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Adjust Credit Limit: Providing insights to the credit staff about a customer's financial condition to recommend adjustments or termination of credit limits.
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Monitor Payments Under Settlement Arrangements: Keeping track of scheduled payments and promptly contacting customers if deviations or delays occur in the payment schedule.
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Refer to Collection Agency: As a last resort, shifting unresolved invoices to a collection agency and placing the customer on a credit hold list.
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Sue the Customer: In extreme cases, consulting legal staff to pursue legal action against the customer if other collection methods fail, ensuring the viability of winning a judgment and the customer's ability to pay.
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Write Off Remaining Balance: Finalizing the process by completing a credit memo approval form for the amount of unpaid invoices.
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Conduct Post Mortem: Evaluating the collection process, identifying system issues or inefficiencies, assigning responsibilities, and scheduling follow-up meetings to rectify problems.
These concepts encompass a range of activities crucial in managing collections effectively and recovering outstanding debts while maintaining business relationships. The optional nature of some steps allows for adaptability in response to individual customer situations.
For further insights into collection call preparation, debt collection strategies, handling past-due invoices, managing accounts receivable, and small business debt collection, exploring related articles on those specific topics would be beneficial for a more comprehensive understanding.
