Accounts receivable is a term used in businesses where companies allow customers to buy goods or services on credit. If customers only pay by cash or check, then accounts receivable is a very basic type of account that changes easily as payments are made. However, with credit, companies store the money that is owed them but not yet repaid in the account, which makes it an important part of the company earnings strategy. Businesses need plans regarding how they collect the money due in accounts receivable, and how quickly they want to move the debt.
The first step of managing accounts receivable is the basic billing. Companies tend to start out by aiming for a particular billing cycle. They want to collect debts within a time frame, such as 30 days or two months. With this goal in mind, companies mail out invoices to the customers that owe them money and provide them with the options to pay. The instructions regarding payment and consequences should be described very clearly in this step.
Investigation of Billing Issues
When a customer does not pay the bill, the business should investigate the issue. Most billing problems are not caused by customers refusing point-blank to pay the bill, but are rather due to a particular issue. The customer may not have received the service promised, or may have been promised a lengthier payment time frame than was correct. Sometimes invoices lack the necessary information or the order was fulfilled incorrectly. In these cases, the business must correct the issue in order to collect on the accounts receivable.
Past-Due Collection Steps
When the customer does refuse to pay, the business must decide how to handle these late payments. Most businesses have several clear steps they follow. The first step may be a phone call as the deadline is approaching to make sure that the customer will be paying. After the deadline has passed, most companies issue another invoice and make a second phone call as a warning. The company may also decide to take legal action on customers, especially for larger debts.
When a business does not think that a debt will ever be paid, it tries to get the debt out of its accounts receivable. Many business sell debts to collection agencies for small amounts. The money lost by the business is still present, however, and businesses record this unpaid debt as a loss in their books. This lets the company take a tax reduction for all losses at the end of the year.