Tips for Collecting on Your Accounts Receivable

A receivables aging schedule reveals patterns of delinquency and shows where you need to focus your collection efforts.

The longer accounts receivable (AR) languish, the more likely funds are to become uncollectible.

Accounts receivable are sums due from customers from the time of sale until the receipt of payment.

The time period and the terms of every receivable should be specified clearly. Terms can be stated in various ways, such as:

  • Net 30 days from invoice
  • Net 15 days from shipment
  • 1% 10 days, net 45 days from invoice

The first term calls for payment within 30 days of the invoice date. The second term indicates that payment should be made within 15 days of the shipment date. The third term offers an incentive for early payment; for example, a 1% discount off the invoice amount if payment is made within 10 days of the invoice date. From 10 to 45 days, the customer pays 100% of the invoice.

Receivables are a use of your funds. They are, in effect, loans to customers. While every business owner hopes and expects that customers will pay their debts promptly, the reality is that AR can sometimes linger on the books until they get old.

One simple method of assessing the quality of your receivables is to compare the actual collection period, known as days receivable, to the stated payment terms. The collection period and the terms should be about the same.

If the days receivable are significantly more than the sales terms, consider developing a receivables aging schedule to monitor who owes you money, when the debt was incurred and how long it has been unpaid.

Most receivables aging schedules are broken into 30-, 60- and 90-plus-day increments. Under each of these categories, total the amount due from each of your customers. This allows you to identify the problem customers and focus your collection efforts accordingly.

An aging schedule also enables you to manage your credit policies according to the standards of your particular industry. Many software programs provide aging receivables templates and/or formulas that are handy for small and mid-size enterprises.

It is important to stay on top of your receivables. The quicker you collect your AR, the better your cash flow.

Following are some tips for collecting AR:

Be Prompt: If a payment was due in 30 days, follow up with the customer on day 31.

Be Consistent: Send regular statements to customers who are behind in their payments.

Offer Incentives: Consider offering a bonus or cash price discount for early payment.

Be Specific: Spell out any late-payment fees and penalties prior to granting terms.

Follow Up: Be aware of your customers’ payments and debts. Send acknowledgments when accounts are paid.

Be Realistic: In the final analysis, an AR aging schedule may indicate that it’s time to sever your relationship with a customer or resort to some other type of collection method.

Better to File an Extension Than an Incorrect Return

If you’re expecting a personal income tax refund, it’s smart to file your return on or before April 15 and get your refund back as soon as possible. If you can’t complete your tax return before the deadline, however, filing an extension will buy you six additional months to file the return.

It is better to file an extension than an incorrect return. You will not be fined, cited or penalized for filing a tax extension, and it will not increase your chance of being selected for a random audit. Moreover, if you use a certified public accountant or tax preparation service, you may get better service during the off-peak season as tax professionals are less busy after April 15.

Filing an extension is quick and easy “From the Internal Revenue Service (IRS) website, you can e-file a tax extension or print the forms to mail your extension. However, after the April 15 deadline you can no longer e-file your tax return.

Although filing an extension gives you additional time to file your return, it does not postpone your tax liability. If you owe money to the IRS, you are required to pay 90% of it by April 15. Otherwise, you will be subject to late-payment penalties and interest on any unpaid amount.

If you don’t file an extension or a personal income tax return by April 15 and you owe taxes, the IRS can charge you a 5% failure-to-file penalty each month the tax return is late, up to a maximum of 25% of the amount due. While personal income tax returns are due April 15, it’s also important to keep in mind that LLC, LLP and partnership returns are due on the same date, while S corporation and C corporation returns are due March 15.