CHAPTER 6: COLLECTIONS
6.1 Introduction
Thomas Watson Sr., president of IBM for 40 years, famously said, “Nothing happens until a sale is made.” Perhaps, but it is also true that the benefits of the sale are not realized until payment is made. No matter how good your organization’s products or services are, or how proficient your sales team, all is for naught if you don’t get paid for what you deliver. After all, cash is the lifeblood of business. If the collections team is called to duty, it means the invoice is past due—although companies are starting to be more proactive by having the collections team call prior to the due date to make sure the payment is “ready to pay.” As a meaningful driver of cash receipt, the collections team has a significant impact on the availability of cash for the organization. When an organization extends credit to a customer or client, the customer—by buying the organization’s services or products on credit—becomes a debtor to the organization. In normal situations, most customers pay their bills, satisfying their debt in a timely manner. Some, however, do not. Creating a strong collections department is vital to the success of any business. Many companies struggle with defining the proper protocols for handling delinquent accounts, which can create a real concern for a company’s bottom line.
The longer receivables go uncollected, the less likely it becomes that the invoices will ever be paid. The standard for bad debt write-offs is typically invoices that have aged past 90 days.
Dun & Bradstreet 3 reports that in the early 2020s, in part due to the pandemic and global tensions, almost 50% of nations saw an increase in bankruptcies, some of them quite significant. This trend is expected to continue in some markets. Therefore, it is paramount to employ practices that can ensure collection of outstanding invoices as quickly as possible. Furthermore, failure to implement and follow collections policies and procedures under Generally Accepted Accounting Principles (GAAP) or International financial Reporting Standards (IFRS) can result in: A potential misstatement of the company’s earnings due to unpaid invoices and deductions; and/or A potential overstatement of the company’s profit due to the failure to recognize an uncollectible customer account in the financial records. An effective collections plan can reduce delinquencies and improve cash flow by collecting cash sooner. The plan should comprise a regularly updated system that flags overdue accounts, a set of internal procedures to handle slow-paying customers, and a process by which managers receive regular updates that identify slow-paying customers. The system should allow a memo section to record phone calls and agreements along with a follow-up date alert. As with any other business process, the collections plan should be reviewed regularly for needed improvements.
3 https://www.dnb.com/content/dam/english/economic-and-industry-insight/DnB_Global-Bankruptcy-Report_2023.pdf
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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