Receivables management for small businesses

I spend a quarter to a third of my work time in some function related to collection of fees. It’s a shame because I would rather spend my time doing what I do best – putting more money into the checkbooks of my clients. But of course getting paid for my work is a critical part of the business.  My engagement agreements almost always include a “due at time of invoice” provision and stipulation for payment via electronic transfer. Theoretically I have no receivables. But in real life doesn’t work that way. In reality, balancing my staffing costs in advance of client payments and carrying the out-of-pocket expenses for clients with outstanding balances is a constant challenge. This seems to be a stress point for other accountants and many other small businesses.

Recently an entrepreneur introduced me to a possible solution. His receivables management practice fine-tuned the traditional collection practices to make a program that works for small businesses. He charges a flat $15 per receivable account up to 90 days, another $15 for 91 to 150 days and then 35% plus the legal expenses for collections after that date. At any time in the process the business can remove an account from the collection process by reporting it paid or that a payment arrangement has been negotiated.

The interesting thing about his process it that the collection process is kind, supportive of the business relationship, courteous and non-threatening in the first 90 days. Every opportunity is offered to resolve the outstanding payment. The collection reminders come addressed from the business owner, not the collection agent. They become increasingly more urgent every two weeks for the first 90 days. After 90 days the collection agent takes over and the actions become increasingly urgent and threatening. Finally, the agent has a range of attorneys to collect the balance plus the legal fees through the court system.

I decided to give this firm’s service a try for my own practice. The first step is to modify my engagement agreement to include a notification of the receivable management practice. This is what I propose:

Collection of Receivables – The fees payable under this agreement are due and payable on the date of electronic invoice. If, for any reason, the fee is unpaid 10 days after the invoice date and we have not entered into an agreement for a payment arrangement then the following procedure applies:

  • Day 11 – a $15 fee is added and your outstanding account balance will be managed by an accounts receivable firm on my behalf
  • Day 91 – another $15 fee is added and your account is transferred to an account receivable management firm acting on my behalf.
  • Day 151 – a 35% fee is added to the outstanding balance and legal fees may apply as awarded by a court. 

Most accountants, and I presume most other small businesses, would say that a client who goes 150 past due is not likely to be a client in the future. In this case, the risk of taking assertive collection action is unlikely to affect our business.

I will likely write a follow-up post about the results of this practice sometime next year. In the meanwhile, like always, comments and suggestions are welcome.

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