Collections: Cash & Paper Trail

An incredibly frustrating aspect of business is providing a quality product or service to the customer and then not getting paid. You and your colleagues did everything right and month after month passes without payment. Your accounts receivable (A/R) team escalates the sizable past due invoice up the management chain and, ultimately, to the legal department for litigation. Despite one of the authors of this post being a lawyer, both authors say Stop! Do not run to the legal department yet.

Contract

You are trying to obtain payment for an invoice pursuant to a contract. What is the status of the contract? Was it actually signed by your company and the customer’s company? This question may seem basic to those working for perfect companies that do everything right every day but in the real world, mistakes are made.

Are the payment terms in the contract clear? Frequently, a sales or legal colleague might be the person responsible for negotiating the contract. However, it is always helpful to draw on the expertise within the company and that includes A/R. A/R can provide valuable input to ensure that the contract payment terms reflect the company’s policies and processes (P&P).

Is the contract clear on physical delivery of the product or e-delivery of the software or completion of the services? This is another opportunity to draw on the expertise of colleagues when drafting the contract. P&Ps change over time, so contract drafters should check in periodically with colleagues to ensure they are capturing how the company currently engages with the customer to provide the product or service.

Deficiencies in any of the above aspects of the contract do not mean you cannot collect on the invoice, but they inform you as to where there may be a need to bridge the gap between the company and the customer. It is also important to be aware of potential deficiencies in the contract prior to escalating the issue within your company or the customer’s company.

Invoice

Similar to the contract review, it is important to review the unpaid invoice for potential issues. Your customer may have multiple entities within its structure. Has the invoice been issued to the correct company?

Was the invoice sent to the correct individual within the correct department? Sometimes the invoice should have the address of, for example, the subsidiary in Colombia but it is actually the accounts payable (A/P) department in Mexico or the U.S. processing the payment. The individual in Colombia might think they are receiving the invoice as a courtesy because, of course, it is Mexico or the U.S. who processes the payment.

Does the invoice clearly describe the product which was delivered or services which were provided? Are the services or product part of a larger delivery which must be completed prior to any payment being made?

Is the invoice amount correct? Are accurate banking or payment app details on the invoice?

By conducting a complete internal due diligence before a strong follow up, you may discover issues that can be resolved leading to an amicable result of full payment. Even if you do not discover any issue, you are now well informed to have a conversation with the customer. During this conversation, you can practice good customer relationship skills by giving the customer the opportunity to explain why they have not paid.

Strong Follow Up Creates Useful Paper Trail

As you proceed down the path of chasing down a payment, it is imperative that you document any contact with customer (e.g., email, phone call, letter.) These communications may include an increasing senior level of employee at the customer company. If you do not receive a response from the A/P clerk, it may be helpful to include your sales department in the loop. The sales team can inform you if a special deal was given and you can inform the sales team if a customer has established poor payment habits. Other contact points at the customer company might be A/P Manager, Controller, CFO or General Counsel.

Timing is important. The invoice is already past due. You are not required to set long time frames to hear back from the particular customer employee as you escalate communication at the customer company.

There should be A/R P&Ps in place so there is automated follow up with clients. Such P&Ps can help avoid an invoice reaching the bad debt stage. DSO (days sales outstanding) can adversely impact your company in ways you are unaware (e.g., banking terms, product growth financing, acquisition).

Seeking Third-Party Assistance

It is important to mitigate costs in selecting third party assistance. Litigation is expensive in actual dollars spent on outside counsel and internal time from finance and legal department staff who already have full time jobs. Law firms specializing in collections may be potentially less costly than litigation but, there is a high fee when dealing with experienced lawyers. The option of using a large collection agency can also be expensive given the significant percentage taken from the recovered debt and the minimal control your company has over the treatment of the customer.

Forging a relationship with a specialized consultant may be the optimal path. With a specialized consultant, you are able to negotiate the fee rather than a one-size fits all large collection company’s formula. One past due invoice does not necessarily mean terminating the customer relationship, so it is important to use a consultant who is focused on resolution not antagonizing the customer. The consultant should have in-house experience which would make her more sensitive to professionally communicating with the customer and better able to understand your company and the customer’s internal department structures. The consultant should also be familiar with legal processes, so an effective paper trail is created in the event litigation is required.

If you would like assistance, please contact Maureen McMorrow Consulting Services: mmsud26@gmail.com.

Maureen McMorrow has an MBA in Finance and twenty-five years’ corporate finance experience both domestic and international. At senior management in-house level, she was responsible for areas including: treasury, cash management, investments, line of credit, risk management, due diligence in corporate acquisitions and divestitures, creating and implementing policies and procedures, implementing compliance programs for areas of responsibility achieving full compliance annually.

Specializing in small companies with limited accounts receivable capability and large companies with a significant large unpaid invoice that should be separated from the standard past due batch being sent to internal or external collections teams.