4 Ways to help stay on top of receivables

Imagine, someone in sales closing a massive deal. It’s a new customer with a huge, custom order. Great! The production team works under the tight deadline. The new client is pleased that everything is shipped on time and comes back looking spectacular. But wait, did you get paid?

While everyone was focused on helping the client, who was helping the company? The customer’s credit was not checked. No one collected a down payment. The billing clerk was playing chase with the sales rep and plant manager to receive the accurate information for the invoice. Then that invoice wasn’t mailed until a month later. By then, everyone is ready for the next sale and product. Who is following up on the outstanding bill?

This happens. And happens frequently. Companies across the nation have slip-ups like this from time to time. Here are some tips to keep billings from slipping through the cracks:

  1. Collections is an “everyone” responsibility. Unfortunately, administration gets thrown under the bus when it comes to poor practices with receivables. Yet nearly everyone has a role in making sure invoices are paid.

    It starts with the sales team. They need to make sure customers – old and new, have up-to-date information on file. From phone numbers to email addresses, physical addresses, and names of those over accounts payable, everything should be accurate. And be sure to request approval for credit checks! Sales team members should also negotiate contract terms. For instance, if you decide to have early-bird discounts, or late penalties, and down payments on custom orders.

    Ensure that you do not pay a commission to the sales team until the invoice is collected. Commission percentage paid should decline as the receivable becomes older, or if a credit card is used to pay the invoice.

    The CFO or the owner should approve new clients and terms before accounting sets them up in the system. As well, the CFO or controller should be monitoring accounts. This way, you can make sure there aren’t any outstanding invoices older than 30 days. If there are, you can make sure this doesn’t become a repeat offense.

    Factory members are involved as well. They need to be sure to code jobs properly, and to notify the billing department as soon as orders ship. The administrative team should be sure to properly submit invoices. They should also follow up on any unpaid accounts. Those in charge need to put the right tools and training in place so that employees can be effective.
  1. Create and stick with a process. Just as accountants have procedures with their processes, manufacturing companies should have procedures set in place for efficiency. A delivery truck leaves the dock – an invoice is created for the client. Investing in an electronic billing system can help send invoices quickly, even in the form of a text. Online payments, purchase orders, and even automatic re-orders are all doable.
  2. Have someone manage the account. When you have a designated personnel in charge of specific billing issues, it helps develop a better relationship with clients. All new clients should be monitored closely in the beginning to stay on top of things. Once a trusted relationship is in place, those accounts will not have to be watched as often.
  3. Set up timelines. You want to send a reminder to clients after X days if they have yet to respond to the initial invoice. This sets a precedent going forward. You care about the client, and are willing to assist with payment-related questions/problems, but you also want to receive payment. 

Now, what happens when someone never pays? 

Once in a while, there will be the dreaded realization that you are not collecting money from a customer. When you have to write-off, the Internal Revenue Code offers a tax deduction for business bad debts.

According to the IRC, Section 166:

  1. Wholly worthless debts – There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
  2. Partially worthless debts – When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

Amount of deduction – For purposes of the subsection, the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

To make tax code easier: Business bad debt is a loss from the debt (of the customer not paying). They can also include:

  1. Loans to customers or suppliers that are made for business reasons and have become uncollectible,
  2. Business-related guarantees of debts that have become worthless, and,
  3. Debts attributable to an insolvent partner.

How do you qualify?

  1. Show you have taken reasonable steps to collect the debt with little evidence that it will not be paid.
  2. Must have also previously recognized the revenues that are now being considered as bad debts.

Contact one of our financial professionals TODAY to learn more about how we can take you to the next step.


Topics: Manufacturing & Distribution, Accounting Tips, Audit