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At What Point Should You Escalate Overdue Accounts Receivable?

For a multitude of reasons, businesses often have weak accounts receivables policies. The result is that despite generating impressive sales figures, the money just isn’t making it through the door and goods and services are effectively being given out for free.

Make no mistake, overdue accounts cost your business money and they can significantly impair cash flow, placing you at risk of being unable to pay your own debts as and when they fall due. Not having sufficient capital on hand can also prevent you from being able to invest in growth opportunities, increase shareholder payouts, upgrade your equipment or expand into new product areas.

 

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Whilst you can’t force your clients to always pay on time, there are things you can do to increase your chances of recovering overdue debts and make the debt recovery process simpler. One key rule to managing your accounts receivable is knowing when to escalate them.

 

When Do I Escalate Overdue Accounts?

 

Don’t escalate too late

As a general rule, the later you leave it to action outstanding balances, the worse your prospects of recovering them. Accounts become difficult to collect after 90 days past their due date and by 120 days, you can kiss your chances of recovery good bye.

 

Don’t escalate too early

Escalating accounts too early on the other hand, may have the effect of offending or irritating clients. It is therefore preferable to issue an early, friendly follow up for new unpaid accounts. This can offset a variety of innocent causes of late payment such as simply forgetting or failure to receive the account. It also conveys a no nonsense attitude to those clients that like to string out their credit for as long as they can.

 

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Choosing the appropriate time to escalate

If accounts remain outstanding following one or more friendly reminders, escalating them at an appropriate time can expedite debt recovery. While the common practice in each business and industry is different, overdue accounts in excess of 60 or 90 days are generally considered fair game to escalate. A reasonable action may be to send a notice advising that the client’s account will be turned over to debt collectors if payment is not made within 7 days and/or that their services or supply will be suspended. Further escalation such as demands or the institution of legal proceedings may be appropriate for 120 day and 180 day debts.

However, rigid time frames for escalation may not be appropriate for all debtors. A business must also consider how the tone of their collections will impact client relationships. Taking forceful and swift action against a loyal long term client who has otherwise been a diligent and timely payer may irreparably damage business relations. Therefore a business may do well to extend concessions or flexibility on a case by case basis. Accounts staff should be trained to distinguish debtors who are stringing them along and those with genuine reasons for requiring an extension for payment.

 

Getting your cash collections cycle humming is an efficient way to ensure the continued growth and success of your business. Talk to an expert about how to optimise the revenue your business is collecting today.

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