How to Collect Accounts Receivable: Step-by-Step

Accounts receivable, often abbreviated as AR, represents the money that a business is owed by its customers for goods or services delivered but not yet paid for. Managing and collecting these outstanding amounts is central to maintaining healthy cash flow, which directly influences a business’s ability to cover operational expenses like payroll and inventory. Effective AR management helps prevent cash shortages, reduces the need for external financing, and strengthens overall financial stability. Without consistent cash inflow from collected receivables, a business can face significant challenges in meeting financial obligations and pursuing growth.

Essential Information for Collection

Before initiating collection efforts, a business must compile specific information related to the outstanding debt. This data ensures accuracy and provides details for communication.
Customer contact details are needed, including the customer’s full legal name, current mailing address, active phone numbers, and up-to-date email addresses.

Complete invoice details are also needed for each outstanding amount. This includes:
The unique invoice number
The date the invoice was issued
The due date for payment
The total amount owed
An itemized breakdown of the goods or services provided

Documentation of agreed-upon payment terms, such as “net 30” or “net 60,” should be available. Records of past communications regarding the invoice, including emails, call logs, and notes, are also useful. Proof of delivery or service completion, such as signed receipts or project confirmations, provides evidence of the obligation. Having this information accessible allows for informed discussions and substantiates the claim.

Establishing a Proactive Collection Process

Implementing a systematic approach to accounts receivable management helps businesses minimize overdue accounts and maintain consistent cash flow. A clear starting point involves explicitly stating payment terms on all invoices and within contracts. These terms should outline payment due dates, accepted payment methods, and any penalties for late payments.

Sending invoices promptly after delivery of goods or services reduces delays and sets payment expectations. A proactive strategy includes sending friendly reminders to customers a few days before an invoice is due. These pre-due date reminders, often sent via email or text, can significantly reduce late payments.

Utilizing an accounts receivable aging report is another tool. This report categorizes unpaid invoices by how long they have been outstanding, typically in 30-day intervals (e.g., 0-30 days, 31-60 days, 61-90 days, and 90+ days past due). Businesses use this report to prioritize collection efforts, focusing on the oldest and largest outstanding amounts.

Internal communication protocols should be established, ensuring departments like sales and finance share information about overdue accounts. This collaboration helps maintain a unified approach to customer interactions. Considering payment plan options for customers experiencing temporary financial difficulties can secure payment while preserving customer relationships.

Communicating with Customers for Payment

Once an invoice becomes overdue, direct communication with the customer is needed. The initial communication, typically sent within 1 to 7 days past the due date, should be a friendly reminder. This can be an email that re-attaches the original invoice, politely inquiring about payment status and offering assistance. The tone should be helpful and assume the oversight was unintentional.

If payment is not received after this initial reminder, a more direct follow-up is warranted, usually between 7 and 30 days past due. This often involves a phone call, complemented by a personalized email. The focus shifts to understanding the reason for non-payment, whether it is a forgotten invoice, a dispute, or a financial difficulty. Maintaining an empathetic yet firm approach aims to resolve the issue while preserving the customer relationship.

For invoices outstanding between 30 and 60 days, a more formal communication, such as a letter or email, may be sent. This communication should clearly state the overdue amount, reference previous collection attempts, and outline potential next steps if payment is not received. If a customer expresses an inability to pay the full amount immediately, negotiating a payment plan becomes an option. This involves discussing manageable installment amounts and a realistic payment schedule, formalizing the agreement in writing for clarity. Throughout these interactions, maintaining a professional and empathetic tone helps secure payment while avoiding unnecessary damage to the customer relationship.

Utilizing External Collection Resources

When internal collection efforts have been exhausted and an invoice remains unpaid, businesses may consider external collection resources. Engaging a collection agency is a common option. A collection agency specializes in recovering delinquent debts and typically steps in when invoices are significantly past due, often after 90 to 120 days of non-payment, or when internal attempts have failed.

These agencies contact debtors through various methods, including phone calls, emails, and letters, to secure payment. Collection agencies generally work on a contingency fee basis, receiving a percentage of the amount successfully collected. These fees can range from approximately 25% to 50% of the recovered debt, depending on factors such as the age of the debt, the amount owed, and the difficulty of collection. Older, more difficult-to-collect debts typically incur higher fees. While engaging a collection agency can be effective in recovering funds, businesses should be aware that it can impact the customer relationship, as the agency’s primary goal is debt recovery.