Tax Season 2010

How to Improve Your Collections

By Harry A. Strausser III

Across America, CPA firms diligently protect the financial interests of their clients. The issue of accounts receivable often arises, and clients are advised to increase collection efforts to improve cash flow and profitability. In today's economic environment, companies engage in the proverbial robbing Peter to pay Paul. Ultimately, a domino effect ensues, in which company C can't pay company B because B hasn't been paid by company A. You want to be Paul, and you want to get your money, but that doesn't happen magically.

In the process of advising clients, many accounting firms likewise fall victim to the AR blues. Clients might not pay their accounting invoices promptly, driving company cash flow into the red — hence the need for CPA firms and their clients to start accounting for receivables. Having managed collections for 35 years, I have advised businesses on best practices in the credit and collections industry and would like to share some insight into collections.

Protecting the financial integrity of any business involves three vital steps: First, develop a credit policy. Second, strategize a collection policy. And finally, establish a culture of paying within your organization. These three elements working in unison will enable most firms to make good up-front decisions about customer billing, to promptly deal with late payers, and to convey the firm's position that it expects to be paid on a timely basis for quality services rendered.

Credit Policy
No matter the size of your firm, it is important to be assured that you will be paid promptly for services rendered. Convey your office's expectations for payment and underscore them annually. Each year, my CPA provides me with a "Letter of Engagement" that clearly outlines the services the firm will provide during the coming year.

Such a letter is the perfect opportunity to express your payment terms. Outline when your invoices will be presented, when you expect the invoices to be paid and what you plan to do about delinquent clients. When signing up new clients, ask who did their accounting work in the past. Are they hopping from firm to firm in the area due to nonpayment? Upon reviewing the financials of new clients, you are uniquely positioned to determine their perceived ability to pay.

Collection Policy
Most businesses have a clearly written policy about extending credit, how long they will wait for payment and how much they will allow customers to accrue. This policy is signed by the customer. Unfortunately, the movement to collect stops there. It is imperative to develop a thoughtfully orchestrated collection policy to guide billing staff through varying levels of delinquency. A good collection policy includes but is not limited to the following:

• Is a grace period offered and for how long?

•  Will a finance charge be assessed and how much?

• What actions (telephone or in writing) will be taken at each level of delinquency?

• What collection reminder/notice will be sent according to aging?

• At what level of delinquency do you cease your services?

• When do you write-off the account as bad debt?

• When do you place accounts with outside collection firms?

Culture of Paying
Creditors who get paid first have built and conveyed a culture of paying. After carefully deciding who gets credit, meticulously follow collection polices and ask for the money. There is a slogan in collections that says, "The squeaky wheel gets the oil." The more often you ask to get paid, the more likely you will get paid. This is the foundation of a successful recovery strategy.

One of the predominant mistakes accounting firms make in their billing and collections is the failure to ask for the money. If the ABC Company promises to pay $500 on its invoice tomorrow, and the payment isn't in your office within three days, you MUST contact them immediately. A reminder call made three weeks later will teach the customer that your firm is not serious about collecting. You'll be at the bottom of the payment priority list.

Your office might find much-needed assistance from today's progressive third party debt collection firms. At one time, collection agencies were depositories for older, bad debt. Today, they are partners in every stage of the recovery process. Agencies can send letters on your behalf, make soft collection calls in your name, engage in a variety of pre-collect services, work your accounts after write-off and even file lawsuits on your behalf. Use of this type of resource should be part of any good credit and collection plan.

If your firm is stuck in a quagmire of unpaid invoices and maintains an AR report that would make you cringe if you saw the same figures on a client's balance sheet, all is not lost. Devote time and energy to implementing practical steps to protect your financial resources. Start accounting for your receivables now.

Harry A. Strausser III is president of Remit Corporation/Interact Training & Devlopment. Contact him at Harry@remitcorp.com.