Pay Me the Money: Improving Collection Rates Step-by-Step
by AccountingWEB on
By Alexandra DeFelice
Blame it on a tough economy. Your clients aren't making money, so they aren't paying you.
Yet, you're still cranking out their tax returns and other work for them hoping things will improve and that you'll eventually collect the hard-earned money you deserve.
This may seem like tough love, but your firm isn't a charity. You, too, have expenses that need to be paid every month, and the more clients delay their "due by" dates, the more your firm is going to suffer.
So how can you mitigate the risk? First and foremost is understanding your firm's internal processes related to accounts receivable (A/R), says Jim Kozelek, Partner, Commercial Litigations Group, at Weltman, Weinberg & Reis Co., LPA.
What are you doing on day thirty-one, or even a week prior, to increase the likelihood that past-due clients not only will pay you, but will pay you sooner?
Kozelek suggested the following steps, which can and should be adjusted based on your firm's existing polices and philosophies. It's important to note that depending on the size of your firm, the person handling each step in the process may differ. For example, if you have a heavy investment in a particular client and/or if your firm is small, the initial discussion may need to come from you personally.
Step 1: The Phone Call
In this age of electronic communication, phone calls can seem a bit intimidating, which is precisely why you may want to consider it. Plus, if someone from your A/R department or even an office administrator makes a call to check on the client's payment status, a big red flag could be raised if the number is no longer in service, which could indicate the company went out of business. It can also help verify you have the right contract person - aka throat to choke.
Step 2: The Follow-up Letter
Regardless of whether you get a human being on the phone, send a follow-up letter around day forty-five. Ask for the check number and bank name. This step helps build the paper trail for your firm and demonstrates you're escalating the issue. Additionally, it serves as another check that the address is correct and the company hasn't relocated or closed.
Step 3: Escalate the Issue
This could mean a partner, owner, or anyone else you deem fit – just move it up the chain, Kozelek said. Should the person escalating write a letter, make a phone call, or take other action? This depends; it may come down to making a decision on case-by-case basis, he said. But, "at some point, the business decision comes into play. When is this client/customer no longer a customer?"
The amount withstanding could be a determining factor, he suggested, but the message needs to come from the top that the firm has an A/R problem, and "We don't want to get deeper in the hole until we get the money we're owed," he said.
Eventually, the issue may need to move externally to a collection agency or law firm. But showing you have a process in place will "skim off the top." Kozelek explained: "Essentially, everyone has a certain fear threshold they aren't willing to surpass, and each time you escalate the issue may increase the likelihood of collection."
If you do take the issue to court, it could take anywhere from 180 days to 9 months, so have something in place in the engagement letter or elsewhere indicating the client will be responsible for any collection fees – including lawyer fees – which could add up to roughly 25 percent of the collection sum. After all, why should your firm lose money it was promised because you needed to solicit outside counsel to collect it?
Other advice Kozelek gave to help protect your firm from additional cost burdens includes:
- Ask for 1.5–2 percent monthly interest on any balance not paid within the terms of the agreement. Use this as leverage during an initial phone call to say you're willing to waive the interest "this time."
- Ask for a personal guarantor who is liable for any outstanding debt. This protects the firm in the instance that the company goes "out of business" but reopens with a similar name and type of service.
Even with longtime clients, it never hurts to protect yourself. "Credit agreements give you more bite," Kozelek said.
About the author
Alexandra DeFelice is senior manager of communications and program development for Moore Stephens North America, a regional member of Moore Stephens International, a network of more than 360 accounting and consulting firm, with nearly 650 offices in almost 100 countries. She can be reached at firstname.lastname@example.org.