Handling Late Payments and Accounts Receivable

The invoice is past due. A sharp note feels like the next move. The real block may be a missing invoice.

SCORE’s collections brief says most collection failures come from waiting too long. The same brief says that on the first call you may learn the invoice never arrived. Handle late payments by finding that fact early and writing down what happens next.

What accounts receivable is

Accounts receivable management starts with a definition. Receivables are the amounts customers owe after you deliver and extend credit. SCORE’s brief calls that money AR. It is not cash. Bankrate says an unpaid invoice can sit for 30 to 90 days. Your rent and payroll do not sit with it.

IRS Publication 583 ties the unpaid bill to your tax method. Under the cash method you report income when you receive it. An open invoice is not income yet. Under the accrual method you report income when you earn it. The books and the return have to use the same method. A pile of unpaid invoices can look like a strong month on an accrual report while the bank account is thin.

Preparation before the first late invoice

Reduce late payments before the due date. SCORE’s brief splits preparation into three moves.

Know the people. One block to getting paid is not knowing who can approve the payment. Once the talk turns hostile, the customer may tell you little. A credit application at the start of a major account names the people you will call. The SBA says to use a credit application and to offer terms only after the customer passes your review. A SCORE cash-flow handout says to run a credit check before you accept the customer or allow terms. That check lowers the chance of a late payment or a debt you never collect.

State the terms and the next step. Tell the buyer the payment terms. Tell them what you will do if they miss the date. SCORE lists steps you might name. Stop further credit. Charge a late penalty. Pause or withdraw the service. Send the account to a collection agency. The brief says agencies tend to fail. Ask a lawyer before you stop service. SCORE says stopping work can create liability if you harm the client’s business.

Send the terms in writing before the first sale. Repeat them on every invoice. The SBA says to invoice at once and to keep a follow-up system. A SCORE handout says a delay makes collection harder. Remind the customer. Then call. Stay professional and firm. The handout calls it a business issue.

Send the invoice to accounts payable. SCORE says the client’s accounting desk should log the bill. An invoice that goes to someone else may never enter their system. It may sit with one person who has not approved it. Check with accounting that the invoice is in their books.

A purchase order belongs in this setup when the client requires one. The SCORE handout says to get the number before you start. If you finish the work and then ask, you wait while their accounts desk catches up. You cannot collect an invoice you are not allowed to send.

The AR follow-up process

An AR follow-up process is a written list of who does what. SCORE says the person who collects needs that list and a way to record each step. These sources do not give a universal email on day three and a letter on day ten. They do give a weekly review and two age lines.

Build a simple log. For each aged invoice record who you contacted and when you contacted them. Record what they will do and who on your side owns the next step. Keep a history. SCORE says the customers who pay late tend to do it again. If more than one person collects, use one shared sheet so everyone sees the current note. A reminder on the calendar tells you to take the next step. SCORE says that without the reminder you will not stay with it.

Each week, pull an aged list from your records. SCORE says to review accounts past 60 days and past 90 days. For a customer with a late history or a large balance, the brief says you might use 30 days or 45 days instead. Write down four roles.

• Who produces the aged list.
• Who reads it.
• Who calls the 60-day and 90-day accounts.
• Who checks that the review happened.

Past 60 days

Polite payment reminders at this stage are a question. SCORE says to call the client’s accounts payable contact and ask whether there is a problem with the product or the service. The brief says you will learn the invoice never arrived in about half of these calls. If nobody has approved it, ask who does. Call that person and ask the same question.

Then choose one path. Fix the problem. Or ask for payment now. Say what you expect and when you will take the next step. Record the call.

Past 90 days

By 90 days you should have several contacts and no mystery left about the work. SCORE says to ask for payment now. Then send a written notice by certified mail. The notice names the next step you may take. The brief lists a lawyer or small claims court or repossession of the product when that fits.

The owner makes this call. SCORE says a call from the owner to the client’s owner gets attention that a staff call does not. A one-page letter from your lawyer that asks about payment can do similar work. Ask the lawyer what that letter costs before you send a stack of them.

Have a lawyer review the whole process before you use it. SCORE points you to the Federal Trade Commission’s Fair Debt Collection Practices Act and to your state’s rules on unfair collection methods. This article does not decide which of those rules apply to you.

Track accounts receivable so the list is true

Track accounts receivable in the same place you track cash. Bankrate says a bank reconciliation is how you manage receivables and payables. Match the ledger to the bank statement. A deposit that has not cleared is not money you can spend. Enter the bank’s fees and the interest it paid. Many businesses do this after the monthly statement. A busier account may need a shorter cycle. Bankrate says some businesses reconcile daily.

The aged list is only as good as the invoices behind it. IRS Publication 583 says to keep invoices because they show the amount and the source of gross receipts. Keep them with deposit slips and Forms 1099-NEC and 1099-MISC. Organize the file by year and by type of income. The common record window in that publication is three years after you file. A return filed early counts as filed on the due date. The window is six years if you leave out income that is more than 25 percent of the gross income on the return. There is no time limit if you never file or if the return is fraudulent.

A claim for a bad-debt deduction uses a seven-year window in IRS Publication 583. The publication does not say every unpaid invoice qualifies. Under the cash method the income was never reported. Talk with a preparer before you deduct a balance you did not include in income. Keep the invoice and the contract and the collection log either way. SCORE says that file is what you carry into small claims. The judge hears a short case. The brief says the prepared party tends to win. Bring proof of delivery and a record of the collection attempts.

If the open invoices live in QuickBooks Online, the aged list and the note from each call can sit on the same customer. You decide when 60 days becomes a call. The record shows that you made it.

Client collections tips when the usual steps fail

Small business collections has a last tier. SCORE separates two kinds of trouble. A large share of late invoices are a missing bill or an unresolved complaint about the work. Fix those and many accounts pay. A few customers will not pay after that. The brief calls them the bad apple.

For that customer, SCORE says a short letter from your lawyer resolves the matter in many cases. If it does not, the brief offers two further options. A collection agency. Small claims court. The brief says an agency is expensive and tends to fail. It says small claims succeeds in many cases and that you do not need a lawyer. You do spend time. Filing has a cost. The steps and the dollar cap differ by county. SCORE’s Cincinnati brief uses Hamilton County as a local example and names a six-thousand-dollar cap there. Call your county clerk or read the court’s booklet before you file. Do not treat that cap as your county’s rule.

SCORE describes the hearing as short. Bring proof that you delivered the work and proof that you tried to collect. The brief says a customer who does not appear can produce a default judgment. It says many courts then use the sheriff or the police to collect. Winning the hearing is not the same as cash in the account that day. The other side may pay when the court notice arrives, because their time has a cost too.

Card payments that the customer made without the card in your hand are a separate mess. SCORE says the card company starts from the assumption that the problem sits with the seller. The brief suggests a ceiling on phone and web card sales and a copy of the card for amounts above that ceiling. It does not set the ceiling.

Bankrate describes a different tool for invoices you expect the client to pay. Factoring sells the invoice. The factor advances 70 percent to 90 percent and collects from your client. Bankrate’s example is a thirty-thousand-dollar invoice. A 90 percent advance is twenty-seven thousand dollars. A 4 percent fee is twelve hundred dollars. After the client pays, the example pays eighteen hundred dollars more. You receive twenty-eight thousand eight hundred dollars in total. A separate Bankrate guide says these products can cost 5 percent or more of the invoice. Invoice financing is a loan against the invoice. Your client pays you. You repay the lender. Bankrate says you can remain responsible if the client never pays. Read that clause. This is a fee you pay to skip the wait. It is not a substitute for the 60-day call.

Improve the collections process

Improve collections process work is mostly consistency. SCORE says the buyer takes you seriously when you do what you said you would do. Resend the invoice if you promised a copy. Call on the day you named. A buyer who knows you will call again treats the bill as real.

Use the SBA’s earlier tools so fewer invoices reach day 60.

• A minimum deposit on the purchase.
• A discount for paying early.
• Cash on delivery for a customer who pays late.
• Credit only after the application and the check.

A SCORE handout says to forecast cash for at least six to nine months and to test a 10 percent drop in sales. That forecast shows which late accounts would break the month. Collect those first.

Pitfalls

• A call with no record. SCORE says the court file is the history of what you said and what they said.
• Waiting until the balance is old. The brief says that is why most collections fail.
• An invoice sent to the wrong person. SCORE says it may never enter their accounting system.
• Stopping the work with no legal review. SCORE says that move can create liability.
• A collection agency as the first call. The brief says agencies cost money and tend to fail. Use the 60-day call first.
• A small-claims cap copied from another county. SCORE says the rules differ. Read your clerk’s booklet.
• A bad-debt deduction on a cash-method invoice you never reported as income. IRS Publication 583 ties income under that method to cash you received. Ask a preparer.
• A factoring contract you do not read. Bankrate says you can owe the advance if the client does not pay.

This week’s collection pass

1. List every open invoice with the due date and the age.
2. Confirm the invoice is in the client’s accounting system. SCORE says to check that before you argue about the balance.
3. For accounts past 60 days, call and ask whether the work has a problem. Fix it or ask for payment. Write down the next date.
4. For accounts past 90 days, the owner calls and a certified letter names the next step you are willing to take.
5. File the invoice and the contract and the log with that year’s income records.
6. Ask a lawyer to read the process before you pause service or name a lawsuit.

A shared sheet can hold the log while the list is short. When the aged balances live in the same system as the invoice, the weekly review starts from that list. QuickBooks Online is one place to keep that list. The call is yours. The note is what makes the next call count.

You get paid when the right person has the invoice and knows you will follow the step you named.