An accounts receivable policy is a uniform rule for how a business handles delinquent accounts and debt recovery. Instead of deciding case by case, the company applies the same process to all accounts, such as moving accounts to pre-collections after a set period and to collections later if needed. The post says this helps keep debt recovery less personal, supports lower DSO, and can reduce bad debt.
- A uniform accounts receivable policy keeps debt recovery consistent across all accounts.
- Case-by-case collections can increase DSO and lead to more bad debt.
- Using a standard policy helps preserve customer relationships by making collections a business matter, not a personal one.
Frequently Asked Questions
What is an accounts receivable policy?
An accounts receivable policy is a uniform approach for deciding when and how to act on delinquent accounts. The post explains that Fortune 500 companies use standardized collections policies so every account is treated the same, rather than handling each delinquency on a case-by-case basis.
Why should a business have a uniform accounts receivable policy?
A uniform accounts receivable policy helps make debt recovery consistent and less personal. According to the post, this can support lower DSO, reduce bad debt, and give the business a better chance to keep valued customers while still collecting overdue balances.
How does a standardized collections policy help customer relationships?
The post says a standardized policy can preserve customer relationships because the business can point to corporate policy instead of making a personal decision. That makes collections feel less like a judgment about a specific customer and more like a consistent business process applied to everyone.
What is the risk of handling accounts receivable case by case?
Case-by-case collections can lead to higher DSO and more bad debt by the end of the year. The post also notes that when a business relies too much on personalized service in AR, customers who usually pay on time may still become late and harder to collect from.
When should overdue accounts be sent to collections?
The post gives one example of a large company policy: accounts may go into pre-collections after 60 days and to collections after 120 days if they are not brought current. It presents this as an example of a uniform policy, not a required standard for every business.
Small and mid-sized businesses usually pride themselves on delivering personalized service to customers. People generally enjoy interacting with businesses that know their names and understand their needs.
A small or mid-sized business may have a more accurate idea of which customers would like which new products or services, and they rely on long-term customer loyalty to keep them thriving. Particularly when a business is located off the beaten path, they must depend upon building up a satisfied and loyal client base.
But there are some aspects of small and mid-sized business management where the personalized approach can lead to problems. One of those is with accounts receivable.
Personalized Approach to Accounts Receivable Can Lead to Problems
A business that is used to providing personal service to customers may naturally think it’s a good idea to extend that personal service to AR. After all, when working with a loyal client base for several years, a company gets to know who tends to pay on time.
But small businesses don’t know everything about their customers. A customer or business that has paid on time for years may undergo a personal or financial setback that is not widely known. Suddenly, the customer or business who consistently paid on time is late. If similar things happen to several customers, days sales outstanding (DSO) can creep up. Collecting on debt can become more difficult, taking up more time and getting less favorable results.
Fortune 500 Companies Have Uniform Collections Policies
Big enterprises operate differently from smaller, local businesses, but they do something that every small business can learn from. Large companies create and implement their own uniform policy on when and how to take action on delinquent accounts.
For example, a large company may place accounts into pre-collections after 60 days, and then send them to collections after 120 days if they’re not brought up to date. While this may seem to fly in the face of “personalized service,” it can actually help preserve customer relationships. When the company can cite corporate policy for sending someone’s accounts to collections, it’s far less personal than if each delinquency is handled on a case by case basis. Everyone is treated the same.
Standardized Collections Policies Can Result in Less Bad Debt
Case-by-case policies for collections ultimately can lead to higher DSO and more bad debt at the end of the year. By contrast, data on large enterprises with uniform policies on debt recovery shows that yearly DSO is lower, and they have a smaller percentage of write-offs at the end of the year.
In other words, while personalized service is appropriate for many aspects of small business operation, it should not apply to debt recovery. For more successful debt recovery, you need a uniform policy applied consistently across all accounts.
Does your business have a uniform debt recovery policy for all of your AR? It should, even if you built your business on personalized service. Having such a policy and sticking to it consistently makes debt recovery a business and not a personal matter, giving you a better opportunity to keep valued customers. And lower DSO and higher debt recovery rates help ensure that your business remains profitable so it can continue to provide personalized service to customers.
For accounts that your policy deems ready for collections, partner with a professional collection agency like TSI. Our data-driven approach is designed to boost debt recovery while enhancing the relationship with your valuable customers. Learn more today.