What Are Accounts Receivable Collections?

Accounts receivable (A/R) collections involve the systematic recovery of money owed to a business for goods or services already provided on credit. This process is fundamental for maintaining a business’s cash flow, ensuring funds for operating expenses and future growth. Effectively managing these outstanding balances directly impacts a company’s financial stability and profitability.

Understanding Accounts Receivable

Accounts receivable (A/R) arises when a business sells goods or provides services on credit, meaning payment is not received immediately. This arrangement is formalized through an invoice, a commercial document detailing the transaction, including items sold, the amount due, and payment terms. For example, “Net 30” indicates the full amount is due within 30 days of the invoice date.

An A/R balance remains an asset on the business’s balance sheet until it is paid or written off as bad debt. Timely tracking of A/R is important for monitoring financial health and predicting future cash inflows. Businesses categorize accounts receivable by aging, such as balances outstanding for 30, 60, or 90 days, as older accounts become more difficult to collect.

The Collections Process

The process of collecting accounts receivable begins with a proactive approach to ensure timely payments. Businesses often send initial payment reminders shortly before or on the invoice due date. These reminders help customers avoid overlooking obligations and maintain a positive relationship.

If an invoice remains unpaid past its due date, the collections process escalates with more direct communication. This often involves follow-up phone calls to discuss the overdue balance and understand any payment issues. Many businesses also send dunning letters, which are formal written notices informing the customer of the overdue amount, potential late fees, and next steps if payment is not received.

Further escalation for significantly overdue accounts might include sending certified letters or initiating a final demand for payment. Maintaining accurate records of all communications, payment promises, and collection attempts is important. This documentation supports future actions, such as reporting to credit bureaus or pursuing legal remedies, though legal action is generally a last resort for very large or persistently unpaid debts.

Internal vs. External Collection Efforts

Businesses approach accounts receivable collections using either internal staff or external third-party agencies. Internal collection efforts involve a company’s accounting department or dedicated personnel. These staff members manage customer invoices, send reminders, make follow-up calls, and handle initial negotiations regarding overdue payments.

This internal approach allows businesses to maintain direct customer relationships and control the collection strategy. However, as accounts become significantly overdue, often beyond 90 or 120 days, or if internal resources are strained, companies may consider outsourcing. External collection agencies specialize in recovering delinquent debts and often have more aggressive strategies and legal expertise.

These agencies operate on a contingency fee basis, receiving a percentage of the amount successfully collected, which can range from approximately 15% to 50% of the recovered debt. When a business engages a third-party collection agency, the Fair Debt Collection Practices Act (FDCPA) applies. This federal law sets rules for how these agencies can interact with consumers, prohibiting deceptive, unfair, and abusive collection practices and providing consumers with protections regarding communication and conduct.