5 Reasons for a Business-to-Business Accounts Receivable Management & Collections Policy
Policies and procedures can make or break a business-to-business accounts receivable management strategy. Accounts receivable and collections policies contribute to and protect your cash flow by organizing guidelines to follow when extending payment terms and credit to clients. The sooner you collect invoices, the more accurately your firm can plan for inventory and pay vendors.
Below are five reasons to establish B2B accounts receivable and collection policies for your expanding business:
Set Goals
Strategic and manageable goals should be part of developing your accounts receivable department. The best way to decide your collection goals is to examine your cash flow requirements and access to the capital your company will need at any given time. Does your business need more cash up-front and a smaller amount of credit clients? Accounts receivable is money that will be obtained in the future instead of cash-in-hand available now. Consider these aspects:
- Days Sales Outstanding (DSO) – average time outstanding
- Collections Effectiveness Index (CEI) – a measure of performance
- Percentage of bad debt write-offs that are tolerable to your business
- Evaluation of all accounts and payment histories
Determine Responsibilities
Within the accounts receivable department, responsibilities may be delegated amongst the team. Some collection team members may secure accurate information from sales but not necessarily run credit checks. The individual who does the invoicing may not be the same person attempting to collect overdue invoices. These defined responsibilities will help ensure accounts receivables management is efficient and productive in a growing business without complication. Some roles and responsibilities to be considered include:
- Credit Manager
- Credit Analyst
- Collections Specialist
- Clerk
Oversee Invoicing
Invoicing is critical to collecting on client accounts. Managing invoicing, however, goes beyond simply sending an invoice to a client. Accounts receivable policies should also define when, where, to whom and how invoicing is sent. Managing invoicing also means determining when invoices are reviewed, so the team is notified when an account is past due. Set up a policy to determine the following:
- When to invoice – day of the week/month or when the sale is complete?
- When to review invoices for late payments
- Who, what, when, where and how to invoice
- When and who to contact when an invoice is unpaid or incorrect
Assess Credit
A credit policy is necessary for successful accounts receivable management when considering credit or future payments from clients. This policy will outline procedures for determining credit and credit limits and what histories will be evaluated. Other factors to consider:
- What credit standards are mandatory?
- Will credit reports or references be needed?
- At what limits will more documentation be required?
- What credit and payback terms work for your cash flow needs?
Set up Collections Policy
Indeed, not least is a policy to know when to pass an unpaid invoice to collections. A collections policy can also be used to conclude if clients will be given discounts or incentives to pay early or in full. Making your clients aware of the collections policy could also encourage them to pay faster. Here are points to consider in a collections policy:
- How many days past due will prompt a demand letter or reminder?
- How frequently will you attempt contact, and when?
- When will you send the account to the collections agency? Will the amount due determine this or the days past due?
As a growing business, accounts receivables and collections policies establish helpful procedures that are designed to prepare your organization for the future. Whether your accounts receivable management team is one person or an entire division, setting aside the time to establish these processes will keep your accounts receivables manageable and your cash-flow reliable.
Don’t accept bad debt as a cost of doing business in the B2B space. It simply doesn’t have to be that way. Reach out to my team of B2B collection agency professionals or me anytime!.
