When it comes to running a successful business, managing accounts receivable (AR) is critical. However, many businesses often overlook the crucial role that timely collections play in maintaining healthy cash flow. The scenario is common: an invoice goes past due, and the more time elapses, the more difficult it becomes to collect. In fact, when it comes to past-due invoices, time can be your worst enemy.
Each day an invoice remains unpaid, the probability of collecting the full amount decreases significantly. This scenario not only impacts your business's cash flow but also demands additional resources and time in chasing these payments. So, why does this happen and how can it be mitigated?
Understanding the Impact of Time:
There are several reasons why the likelihood of collecting past due invoices decreases over time. The most obvious is that the longer a debt is outstanding, the more likely it is that the debtor’s financial situation will worsen, making payment less probable. Furthermore, as a debt ages, documentation can get misplaced, memory of the product or service delivered may fade, and disputes over the invoice may become harder to resolve.
Moreover, as per a study by the Commercial Collection Agency Association, once an invoice is past due by just 90 days, the chance of full collection drops to below 75%. When an invoice is six months overdue, your chance of collection drops to 50%. By one year, it drops to below 25%.
Strategies for Timely Collection:
Given the impact of time on collections, it is crucial for businesses to adopt effective strategies to manage overdue invoices promptly:
Proactive Communication: A simple reminder about the due date can reduce the number of late payments. Make sure to send invoice reminders regularly and promptly.
Clear Terms and Conditions: Be clear about your payment terms from the start. This eliminates any confusion and sets the right expectations.
Early Intervention: The moment an invoice becomes overdue, act immediately. The sooner you engage with a client regarding a past-due invoice, the higher your chances of receiving payment.
Leverage Technology: Use AR management software to automate the invoicing and follow-up process, thereby improving efficiency and reducing the chance of human error.
Engage Collection Agencies: If an invoice is significantly overdue, consider engaging a collection agency or legal support. The sooner they can start working on your case, the better your chances of collection.
Effectively managing AR is a crucial component of a business's financial health. It's imperative to understand that when it comes to past-due invoices,