Decide terms before you extend credit
A credit policy answers who gets payment terms, how much, and on what evidence. For a new business customer you might request a credit application, trade references, and a limit. For a small order, you may ask for payment up front. Write the policy down and apply it to everyone.
A review of terms for your largest customers once a year catches those whose limits no longer fit.
A collections routine
Send the invoice promptly with clear terms and a payment link. Remind a few days before it is due. When it is overdue, follow up by phone, record what was said and the date promised, and follow up again if the date passes. Escalate to a written notice and to a pause on new work for chronic late payers.
Assign one person to own the routine and review the aging report with them each week.
Disputes
Customers sometimes dispute an invoice. Log the dispute, the reason, and who is resolving it. Keep the invoice open and visible on the aging report with a flag. Resolve it with a credit memo or a corrected invoice, and measure how long disputes take. A pattern of disputes about the same issue is a signal about quoting or delivery.
Allowance and write-offs
Some invoices will not be paid. An allowance for doubtful accounts is an estimate of the loss that sits against receivables, based on how old balances are. It brings the cost into the period of the sale instead of when you give up.
When you conclude a specific invoice is uncollectible, write it off against the allowance, and keep documents showing your collection efforts. For tax, deduction rules for bad debts are specific, so ask your preparer how they apply to your accounting method.
Selling receivables
Factoring sells invoices to a finance company for cash now. Some arrangements are true sales and others are loans secured by the invoices, depending on whether you keep the risk of non-payment. The classification changes how the books show it, and the fees and holdbacks affect your margin. Read the agreement and ask your accountant before you record it.
Frequently asked questions
When is an invoice uncollectible?
When you have made reasonable efforts and conclude it will not be paid, such as a customer in bankruptcy or no response after repeated attempts.
Should I charge interest on late invoices?
If your contract allows it. Many companies state a late fee on the invoice and waive it for customers who pay promptly after a reminder.
What is a good collection period?
Close to your payment terms. A gap of more than a few days means customers are treating your terms as a suggestion.