If you’ve struggled with your B2B accounts receivable, you may have decided that enough was enough and put some kind of collection policy in place. However, collections are easier said than done. Many businesses stumble when implementing a new collection procedure or process, and end up with a policy that’s ineffective, turns customers away, and has an overall negative impact. Not sure if yours is doing the trick? Here are 5 signs that your collection policy isn’t working and it’s time to make some changes.
What Is a Collections Policy?
A collections policy is a set of guidelines and procedures that an organization or business follows in order to manage their accounts receivable, which is the money that is owed to them by their customers or clients.
It outlines the steps they will take to collect outstanding debts, including the frequency of billing, the types of communication that will be used to contact customers, and the consequences for not paying on time. It may also include information on how to handle disputes and delinquent accounts.
Why Implement a Collections Policy?
Knowing whether or when a customer will pay is an important part of your business planning. A collections policy is important for maintaining good cash flow and protecting yourself from financial losses. You need one with clear procedures for billing, invoicing, and collection to ensure that the organization is following legal and ethical guidelines for debt collection. Furthermore, it establishes expectations and communication with customers about payment terms, which can reduce the likelihood of disputes and maintain good relationships.
What Are the Legal Consequences of Having a Bad Collections Policy?
Having a bad collections policy can result in a number of legal consequences, including:
- Violation of Consumer Protection Laws: If a collections policy violates consumer protection laws, such as the Fair Debt Collection Practices Act (FDCPA), it can lead to legal action being taken against the business. Violations of the FDCPA can result in fines, damages, and other penalties.
- Lawsuits: If a collections policy is unfair or unethical, it can result in lawsuits being filed by the individuals or entities being targeted by the policy. This can result in costly legal fees, damages, and other penalties.
- Reputation Damage: A bad collections policy can also damage the reputation of the business, leading to loss of customers and revenue. This can have a long-lasting impact on the business’s bottom line.
- Regulatory Action: In addition to consumer protection laws, there are also other regulatory bodies that oversee collections practices, such as the Consumer Financial Protection Bureau (CFPB) and state attorney general offices. If a collections policy violates regulations, it can result in regulatory action being taken against the business.
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5 Signs That Your Accounts Receivable Collections Policy Needs a Change
Are you a business owner struggling with a poor collections policy? If so, you’re not alone. Here are a few signs that your current policy isn’t working:
Sign 1: You’re Constantly Chasing Customers Down
You shouldn’t have to constantly call or email customers for payment, especially on a regular basis. Make sure you give them enough time and that there aren’t any other issues (such as customer service problems) impacting your sales.
Sign 2: You Receive Late Payments More Often Than Not
You will struggle to manage your accounts receivable and cash flow if the majority of your payments arrive late. The best way to improve your collections is to identify the problem and develop a solution that keeps your customers happy and your process efficient.
Sign 3: You’re Experiencing High Levels of Bad Debt
A large portion of unpaid invoices might mean your customers aren’t getting value out of their products, or perhaps they’re struggling to pay their bills. To avoid a serious strain on your business, consider what kind of issues they are having and how you can resolve them.
Sign 4: Your Collections Effectiveness Index Is Low
The Collections Effectiveness Index (CEI) is a metric that measures the effectiveness of your accounts receivable collection policy and indicates whether yours works or not. A low CEI can indicate a difference between actual and expected recoveries.
Sign 5: Past Due Invoices Are Stacking Up
When invoicing customers, it is important to make sure they know you will track their payments and follow through on any delinquencies.
What to Do When Your Collections Processes Aren’t Working
If you’ve noticed any of these signs, it’s time to take action and make some changes. Here are a few solutions you can use to improve your accounts receivable collection policy:
Take a Closer Look
Take the time to interrogate your processes and look for any weaknesses. Are you following up on past-due invoices in a timely fashion? Are you keeping your customers in the “know” by providing them with an invoice workflow that includes multiple payment options? Is there any room for improvement?
Review Invoicing Procedure
Make sure your invoices are easy to understand and are sent in a timely manner. Confusing wording or unclear descriptions can create confusion on your customers’ part, which could lead to invoices being paid late or not at all.
Here are some tips for improving your invoicing procedures:
- Use Professional Invoicing Software: Invoicing software can streamline the invoicing process and make it easier to create and send invoices. Many invoicing software options also allow businesses to customize invoices with their branding and include payment options, such as online payment portals.
- Standardize Invoicing Procedures: Creating standardized procedures for creating and sending invoices can help reduce errors and ensure that invoices are sent out in a timely manner. This can also help improve cash flow by ensuring that invoices are processed quickly and accurately.
- Use Clear and Concise Language: Invoices should be easy to read and understand. Using clear and concise language can help reduce confusion and prevent errors. This can also help improve customer relationships by making it easier for customers to understand their invoices.
- Provide Detailed Invoices: Detailed invoices can help customers understand the charges and fees they are being billed for. This can also help reduce disputes and improve customer satisfaction.
- Set Up a System for Tracking Payments: Having a system in place for tracking payments can help businesses ensure that invoices are paid on time. This can also help identify delinquent accounts and allow businesses to take action to collect outstanding debts.
- Send Reminders: Sending reminders to customers about upcoming or overdue invoices can help improve payment rates and reduce the amount of time it takes to collect payments.
Overall, improving invoicing processes can help businesses reduce errors, improve cash flow, and maintain positive customer relationships.
Develop Payment Plans
Whether or not you require a deposit, creating a plan that works for both you and your customers can help them better budget for their total bill and pay on time. Enabling them to make payments in smaller installments is a common solution.
Work With a Commercial Collection Agency
A professional collections agency like Rapid Collections can help you recover overdue accounts receivable quickly and efficiently. We specialize in B2B accounts receivable collection services, and our team of experienced professionals has the knowledge and experience to ensure that you get the best results. With Rapid Collections on your side, you can be sure that your accounts receivable are being handled properly, without adding additional stress or headaches to your business operations.