Maximize on account receivable collections – Strategies

Introduction and Definition of Credit Risk

Credit risk is one of the major business risks that has brought businesses, including major multinationals, to their knees.  Credit risk is further more dangerous for a business under incubation. This article will teach you how you can maximize on account receivable collections and keep your business going.

Simply put, credit risk is the inability of a business to collect its accounts receivables when they fall due. This inability to collect accounts receivable constrains the working capital making the business unable to meet its liabilities when they fall due, or resulting to more expensive sources of financing the business like debt.

maximize on account receivable collections
Reduce debts and maximize on account receivable collections

Strategies to maximize on account receivable collections

The following best practices have been known to derive value in the credit control process of collection.

An effective credit control policy is key

One of the ways to address credit risk is to have an effective credit policy that seeks to move accounts receivable from debt collection to credit management. In a credit control policy, debt collection becomes an event as the policy addresses the whole cycle of advancing credit to customers and collection of the same.

However, credit control policies are often disregarded especially when there is pressure to bring in more business. Sales people will focus more on getting that order from a potential client with total disregard of the credit worthiness of the customer.

It is at this point that the services of a credit controller are much required. This is because selling without collecting the proceeds of the sale will only hurt the liquidity position of the business.

The credit control policy will assist the credit controller to properly qualify new customers for their credit worthiness before a sale can be made to them. Part of the qualifying process should be the customer’s ability to pay. New customers should be asked to prepay for their orders in order to establish credit.

Obtain commitment from customers

Commitment from the side of the customer is also important to ensure that the person incurring the debt on behalf of the customer has the required authority to do so. This can be done by obtaining a duly signed purchase order from the customer, a credit application or a contract for service delivery clearly stating the payment terms. This will assist in a big way in case of a dispute arising in future.

Sales people should not go overboard

It is clear that the objectives of the sales people will be to bring in more and more business to the company. To ensure conflicts between credit control and sales department are minimized, sales people must know that they also have a responsibility not to expose the business to credit risk. Their commissions should be tied not only to the billings they do to the customer but also on collectability of the sale.

Charge backs for sales not collected

The credit policy should have a clause of charge backs for any sales that are not collected although a commission was paid upon billing. This will ensure the sales people have a long term thinking for the business and avoid exposing the business to credit risk.

Create an aging list for account receivables

To maximize on account receivable collections and support the effectiveness of a credit policy, the accounting system should show the aging lists of the accounts receivables at any given time. The policy should stipulate the follow up mechanisms to be employed once the aging list is out. For example, what to do with receivables that are 30, 60, 90 or over 90 days old.

Follow up is important

Follow up should be done in consultation with the sales people keeping in mind that the objective of the business is to maintain a customer for as long as the business is in existence. However, the credit policy should clearly state the credit terms that have been advanced to a particular customer. The customer must be made fully aware of these terms after which he will be expected to pay.

Follow up must be consistent so that the customer understands his obligation to pay and finally to be in a consistent payment plan. This will assist the Financial Controller in accurately forecasting for cash flows resulting into a better working capital management.

Information required by customers should be sent promptly

To maximize on account receivable collections, the first thing that the credit control should ensure is that information that the customers need in order to pay is sent out to them in a timely manner. The invoice clearly stating the basic information and any other that the customer might have wanted included should be sent out immediately there is performance.

Receipt confirmation from the customer’s end should be availed to avoid a situation where a payment follow up call is made only to be met with that statement; “We have not received the invoice, please send us a copy”. If accurate and complete documents are not sent out on a timely manner, any other effort to collect the receivable accounts will fail.

Contacts must be established with the accounts payable department of the customer. It can either be through email or telephone contacts. This is to ensure there is a consistent follow up on the account and consequently maximize on account receivable collections.

If the invoice remains unpaid after the due date, then more formal communication needs to start in form of letters.

Follow-up letter one

A week after the due date has passed, a letter inquiring whether there is any problem with the invoice or any other reason affecting the payment should be sent. If however the customer had promised to pay at a certain date then this letter does not need to be sent. Should the customer default in honoring that date, then the letter should be sent immediately. It is a letter seeking information on why the invoice has remained unpaid.

Follow up letter two

A follow-up letter two should be sent one week after the first letter. It should quote the invoice details and any previous communication that has been done on the same. The letter should ask that the payment be made at a certain date or the customer informs you immediately why the payment has delayed. It may sound risky to the business but essentially the customer is not honoring his promises.

Follow up letter three

Follow up letter three should be sent if no payment has been received even after letter two. This letter should indicate the invoice details that is the invoice number, date, amount, and so on. It should quote the previous communications that have been there regarding the same invoice but more importantly, it should demand that the payment be made within say 10 days (or the agreed number of days) after that letter failure to which the case will be referred to a debt collection agency or to lawyers for litigation.

At this point the customer will pay you or you will have to engage a lawyer. Step one above will have to be done right if all the others will have to succeed.

Incentives for early payment

There are other strategies that a business can adopt to entice customers to pay their debts early without resulting into conflict. It is also known as the carrot-and-stick approach. It takes the form of giving a discount to customers who pay earlier or within the same month of billing. Some examples of these strategies include the term: 2/10 net 30. This means that if a customer who is on 30 days credit limit pays within 10 days, he will receive a 2% discount on the amount outstanding. 1 net 30 means if a customer on 30 days credit limit pays within 30 days then he receives a 1% discount.

These incentives will improve the cash flow position of the business as well as maintaining good customer relationships.

A good credit controller should be aware that effective collection methods would highly depend on how the process of service delivery and invoicing happens internally. It will be an exercise in futility to chase for a debt only to realize in the end that internal processes were not followed to ensure accuracy and completeness of the documents.

Reasons like a customer failing to pay his debt because an invoice was not sent or because the wrong invoice was sent to them should never arise. It is also worth noting that customers will not volunteer to solve your internal challenges and would rather wait till you solve them yourself. Furthermore, they are also managing their cash flows and the later they pay you the better for their cash flows.

Mutual relationships between the credit control department and the accounts payable departments of the client will have to be maintained. Collection follow-ups should not only be limited to letters and emails. Telephone and physical visits should also be encouraged because after all we need repeat business from the same customers that we are chasing payments from. Call your customers just to say hallo or congratulate them for corporate or personal achievements. Let them not hear from you only when you are asking for payments. Know the contact person by their names. All these will make the collection process easier.

What if the customer still does not pay?

Credit controllers should not be oblivious of the fact that despite how good a credit policy is, some customers will not honor their terms of payment as expected. This could either be emanating from challenges from the customer’s end or non-performance of some critical aspects from the business that will enable the customer to pay such as failure to issue documents like invoices or job cards to the customer in good time or not sending the invoices at all. It is when this situation arises that the credit control must come up with ways of addressing it.


It must be noted that whatever the kind of credit policy that a business adopts to maximize on account receivable collections, it must not hurt the very existence of business. The credit policy must always strike a balance between the global business objectives and the department’s objectives of collecting as fast as possible. Before a decision to forward the matter to the courts is made, it must be evident that all the other diplomatic measures have failed and hence the decision to involve lawyers. In practice, most businesses part ways with their customers mainly due to debt disputes.

It is sometimes better to weigh whether it is beneficial to the business to write off the unpaid debt or lose future business with the concerned customer, particularly if the business focus is to capture the market that it’s operating in. The incentive model of making customers pay early should be presented to them as an investment opportunity that will assist them make some cost savings through discounts received.

This customer stands to gain some money annually if he complies with the terms of 2 net 30. The same amount will be lost for noncompliance. The success of such terms will be mutually beneficial to both the business and the customer. Finally, a business that only sells and does not collect will fail. It is important that the business is able to collect its sales within the agreed terms so that it’s also able to meet its obligations. The credit control function becomes very instrumental in improving the business liquidity position and any business that is seriously addressing its credit risk should consider employing the services of a credit controller.