Bookkeeping Horror Stories - Accounts Receivable - Part 2

Posted 10/31/2024

Welcome, and Happy Halloween! 

Today we will be premiering the next entry in our Bookkeeping Horror Stories series. Last time we discussed the horrors of accounts receivable gone wrong. If you haven’t read it yet, click here! This post will be Part 2. In other words, this will be the Second Continuous Accounts Receivable Entry, or S.C.A.R.E.   

Previously I talked about 4 stages of an accounts receivable process. To review those are: 

Stage 1: Creating Invoice

Stage 2: Delivery of Good or Service

Stage 3: Collecting

Stage 4: Receiving payment

Whereas our last discussion focused on stages 1 & 2, today we will be looking at stages 3 and 4. I’ll define terms, describe some of the pitfalls I’ve witnessed, and give some tips on how to navigate these steps successfully. 

Collections Horrors:

Collections is the process by which a customer sends you payment owed. Retail stores and other businesses that collect payment at the time of service may not have to worry about collections so much. But many businesses operate on a model wherein payment for products/services is not rendered until a later time, typically within 30 days. 

Collecting is, fundamentally, about communication. You need to be on the same page as the client about the amount owed, but that isn’t all. Your business and the client need to have a shared understanding of the terms of payment, penalties that may be applied, and credits that they may receive. 

Collecting goes wrong when communication goes wrong. I’ve actually experienced this from the client side. I was paying for a monthly service in my personal life, which I was told would be a recurring charge on my credit card. I was charged initially, and I confirmed this when I looked at my credit card statement. But unbeknownst to me, the recurring payment stopped being charged afterwards. I didn’t notice, as I wasn’t looking for this charge in my personal statement. Several months went by before I decided to discontinue service. A few months after that, I got an email from the owner of the company. In the message, he explains that a mistake had been made, and I in fact owed money for months of service. 

Now if you got an email saying that you owed money to a store that you hadn’t dealt with in several months, what would you think? If you are like me, you would immediately be skeptical and wonder if this was an attempted scam. And indeed, I didn’t pay right away for that reason. But I reviewed my old credit card statements carefully, and found that I had indeed not been charged. 

This store was a small business (you know I have a soft spot for small business owners) and the owner was very polite, so I was eager to help get this resolved. In fact they offered to take the payment in monthly installments, but I decided to pay the full balance at once, and the owner was happy to accept. 

Things worked out in the end, but just consider that this business owner hadn’t collected on money owed for almost a year before reaching out. And realistically, many customers would have resisted paying so long after the fact, and the owner could have ended up with nothing. If there had been more communication between parties, this might have been avoided. 

Receiving Payments:

When I say receiving payment, this means the process of updating your books to reflect that payment has been received. It is important to do this promptly when payment comes in, or you may be contacting clients about money they’ve already paid you, which I promise they won’t appreciate. 

I once had a client deposit a dozen or so checks they had received from their customers, and then file them away into customer-organized folders. The problem: they had forgotten to receive the checks in QuickBooks, so the invoices still showed as open. I caught the problem, but it did require extra work to look up the checks that had been filed away. To avoid situations like this, I usually prefer to receive payment in QuickBooks before checks are deposited, or immediately afterwards. It would be terribly embarrassing to contact a customer about an outstanding invoice just to realize their check was sitting in a drawer. 

Tips for Success: 

Stay on top of things - The sooner that your books are updated the better. Make sure invoices are sent to customers promptly. And if you have to reach out to a client about collections, then do so as soon as you can. 

Use AR aging reports often - This is your most important tool in both collections and receiving payments. At either stage in the process, the AR Aging report will usually be your first indication that something is wrong.   

Discuss terms with customers - It could be that customers do not understand the terms on their invoice. Ask the customer if those terms work for them, or if maybe invoicing on a different schedule would be better. 

Get the right contacts - When dealing with large organizations, it can be hard to know who to go to about an overdue invoice. Anytime I am working with a new customer, I like to ask if there is an accounts payable contact. If so, I save their information and ask about reaching out directly to them with any concerns. This is often much faster than speaking with someone in another department and hoping they pass along the message.  

Offer multiple payment options - Maybe your customer just can’t find time to run to the mailbox and send you a check. Ask if they would rather pay via ACH, credit card, or even Zelle. The convenience of these options may encourage customers to be more responsive about payments. 

Set up automated reminders - It is possible through QuickBooks Online to send reminder emails automatically when a payment  goes beyond a certain number of days overdue. In my experience customers are more receptive to these automated messages than to personal messages or calls about overdue invoices. Plus it saves you time!  

Send customers statements - I suggest sending monthly statements to customers by default. This helps alert them to their total amount owed and helps them find discrepancies in their own books. There are 3 kinds of statements: balance forward, open item, and all transaction statements. Balance forward statements give a summary of AR aging for an entire customer history, followed by a transactional list of activity for the most recent month. Open item statements show anything that is considered open in a customer file, including invoices, credit memos, etc. Transaction statements will show activity over a set period, whether the line items are open or not. All three have their uses, so choose whichever you like.

Moving On:

That concludes our accounts receivable horror stories… for now. I may find myself with more horror stories to share in the future, though I hope that won’t be the case. I want to see small businesses succeed, and a good accounts receivable process is a big step towards that goal. And if you want to take another big step towards long-term success with your business, you can reach out to me here!