Accounts Receivable Collection

Credit sales result in accounts receivable. Accounts receivable collection is a major part of any working capital management in a business. The debtor would like to delay payment as far as possible. From the business' perspective, the longer the money remains blocked in these debtors, the more expensive it becomes for the business, as then the business is forced to borrow moneys at higher interest rates from banks for working capital. This erodes the profit margin on the product.

There is a formal procedure that needs to be followed for any debt collection. The business enterprise needs to conform to these procedures. The problem is particularly acute when it is a finance company and the borrower is turning delinquent. The follow up needs to be through letters, reminders, and telephone calls. It is a time consuming procedure, and requires ample manpower, adding to the losses. Credit reporting agencies collect data about borrowers from time to time, and give them credit scores. Therefore, businesses dealing in financial products can use this opportunity to report on such defaulting borrower.

Accounts receivable in manufacturing businesses also entail a credit risk. The business may continue to assume that it will receive the amounts but actually the debt may have already become a bad debt. An accounts receivable collection policy should therefore be in place, defining the accounts receivable collection period, so that the management is always aware of the status, and a systematic follow up with debtors becomes possible.

One of the options available to the business enterprise in respect of accounts receivable is factoring. The business can factor these debts, and avail finance. Factoring means selling these debts to an outsider, and getting the cash in. For this, the business has to offer some discount to the factor. The responsibility of collection of accounts receivable is effectively taken over by this factor. This process is also referred to accounts receivable finance.

Alternately, the business may consider offering some discount on accounts receivable, which will prompt the debtors to come forward and pay up in time for availing the discount. The economics and modalities of this need to be worked such that the business does not end up making any loss by offering these discounts.

Another way of handling accounts receivable collection is to assign the function to some accounts receivable collection agency. There are several agencies offering such services at very competitive costs. Appointing such agencies can certainly reduce the workload, and the employees of the business can focus on the core activity.

There are accounts receivable collections software programs available in the market. These can be used to keep track of the debts, also to focus on those that seem to be getting closer to becoming bad debts. Persistence in following up often results in the debtor paying up the monies.