Dean Kaplan is president of The Kaplan Group, a commercial debt collection agency based in Pismo Beach, California, that specializes in large and international claims. Views are the author’s own.
Negative trends in accounts receivable have not eased over the last 12 months, even as the economy has regained its balance in the wake of the pandemic.
Some 50% of all business-to-business invoices were paid late in 2023 across North America, according to the latest Atradius Payment Practices Barometer. Firms in construction and business and professional services were hit the hardest, Dun and Bradstreet reports, with one-third of all payments in those sectors running at least 91 days late.
Even if you have no AR loss exposure in these troubled industries, you may be tired of looking at past-due payments that effectively mean you are loaning money to non-paying clients at zero interest or of writing off new revenues as bad debt.
If you expect serious AR issues to heal in 2024 simply because the economy looks healthier, think again. It may be time to redouble your efforts to tighten billing and collections systems in order to prevent mounting losses. Here are 6 key recommendations to discuss with your financial and billing teams:
1. Know the full scope of your AR exposures. What do key indicators such as days-sales-outstanding, AR aging and collection effectiveness indexes tell you about the last 12 to 18 months? Evaluate whether your ability to collect past-due amounts has improved or declined, and assess the status and the total of your most delinquent accounts.
2. Reevaluate your billing and collection systems. Are they in need of major upgrades? Worse yet, are semi-automated or even manual steps slowing down billing and collection activities? Ask your team to offer honest feedback as to whether your customer relationship management technology is up to the challenges of doing business in 2024. You may need to invest in new or improved systems (and the staff training to support smooth implementation).
3. Scrutinize the billing and payment language in your customer agreements. Better yet, ask an attorney to go over these clauses with you. Are there vague or inconsistent terms that make it harder for you to take action against non-paying clients? Do your agreements clearly affirm your expectation to be paid on time, every time — and spell out what will happen when customers don’t keep their word?
4. Consider how silos inside your organization contribute to defaults. If your new business and financial teams don’t work well together, AR issues may proliferate. The best way to prevent counterproductive patterns is to make sure sales and marketing teams understand that a qualified client is one with the means to pay and a strong track record of taking AP obligations seriously. Everyone should know the details of your company’s credit acceptance criteria — and sales reps should be careful not to promise credit upfront. New customers who don’t yet qualify can start out on a cash-only basis or a limited credit limit until they’ve proven their creditworthiness.
5. Reframe billing as a crucial part of customer care. Invoice disputes are one of the main causes of late payments. Now is a good time to identify the issues that delayed payments over the past 12 to 18 months. Talk to your billing team to get a better sense of the most common questions they handle and pinpoint key billing issues that trigger confusion, conflict and anger in customers.
6. Take earlier action when accounts fall behind. How long on average did you wait to reach out on past-due amounts in 2023? If the answer is anywhere past 31 days — or 16, if your terms are net 15 — then you’re missing out on the opportunity to resolve things sooner. Early notification paired with your pledge to deliver superior service will keep many billing disputes from reaching the boiling point. Reach out to customers on all available channels when accounts fall overdue. Express trust in their desire to resolve the matter, but affirm you will take quick action if balances remain unpaid.