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AR Best Practices | Answers

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Q:  I am looking for benchmarks or industry standards for the percentage of aged AR over 90 days compared to total AR.


A: We do have general data on AR aging – see The AR Network’s Benchmarks: Accounts Receivable Processes & DSO, under “Benchmarks/Metrics."

Then click the link “Terms & Aging” and scroll down a short way to Aging Report Average. 4.5 percent of AR was reported over 90 days, including 2 percent over 120 days. Keep in mind that what is considered appropriate for one industry may not be correct for another. For instance, certain healthcare companies have a target of 19% or less for over 120 days.



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Q:  Do you have a policy for AR aging (past due) and how the escalation process should be handled?


A: We do have several policies in the Collections Manual on the site that can be adapted to your aging protocol. The AR Collections Manual policies are located in the Tools section under the subtopic "AR Collection Policy Manual" and focus on the Collection Letter Policy and the Collection Call Policy.

Each company and industry have different requirements and standard practices. For instance certain medical firms have a benchmark of keeping their aged AR over 120 days to less than 19% of their total AR. However, for other industries this benchmark would not be acceptable. Here are some considerations to discuss with your management team.

How do we want to segregate the AR to identify specific collection strategies. For example: we will make personal phone calls to the top 20% of our accounts that make up 80% of our revenue for invoices past due.

For invoices with dollar amounts less than $XXX we will send out a series of past due collection letters and past due statements.

An escalation process may look something like:

If an invoice over $XXX is past due, it requires a personal call by the Collections Manager
If an invoice is over $XXX and is past due 60 days, it requires the involvement of the Corporate Controller and Sales Manager
If an invoice is over $XXX and is past due 90 days, it requires the involvement of the VP of Finance and VP of Sales

Since the escalation process is specific to an organization, its industry, and general business practices we have not found one standard practice.



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Q:  When should an account be turned over to a collection agency?


A: If your costs of continuing to try to collect on an overdue account become prohibitive or the amounts are considered too small to warrant your collections department to pursue, you have three options: write off the debt; hire a collection agency; or hire a collection attorney. If the amount owed isn't sizable, the best choice may be to write off the debt.

Deciding when to turn over an account to a collection agency varies by company, industry and the vendor-customer relationship. As a general rule, most companies consider an account 120 days overdue as a candidate for a collection agency. However, if company and its customer have an irreconcilable dispute over an invoice or the debtor fails to cooperate, an account might be assigned to a collection agency much sooner, as early as 30 or 60 days past due.

Although collection agencies frequently succeed in obtaining monies owed, using one could be costly. Fees could total as much as half of the debt. Collection agencies typically don't provide you with legal representation if it becomes necessary to file a lawsuit.

Collection attorneys' rates may be similar to collection agencies' fees. But, hiring a collection attorney provides you with the advantages of having someone to represent you in court. If you company anticipates pursuing a significant number of bad-debt law suits, you may want to hire a collection attorney.

For more information read Collections Compliance .



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Q:  What are best practices for using collection letters?


A: Every collections department should establish policies and procedures that are periodically reviewed. For many businesses, collection or "dunning" letters should be incorporated into collection activities. The letters should be sent via email, fax or regular mail at regular intervals.

Depending on your company's policies, you might send the first collection letter to accounts payable when an account is 30 days past due. The initial letter should be friendly in tone and remind the customer their account is overdue. The second letter, which should be harsher, should be addressed to the accounts payable manager and/or controller. The final or "demand" letter should be sent certified mail or express delivery to record its receipt. It should be sent to the controller or chief financial officer. The director of sales, sales person responsible for the account and credit manager should also receive copies of the third letter. The letter should note that the account will be turned over to a collection agency or attorney and reported to credit reporting agencies.

Each letter should summarize the situation and include the invoice number, invoice date, amount owed, due date, and balance owed. It's important that every letter clearly state where payments should be sent.

Be sure to include contact information, such as the collector or letter sender's name, title, email address, as well as phone and fax numbers.

For collection policy manual templates you can customize and sample collection letters, see AR Collection Policy Manual .



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Q:  What actions – outside of standard collection letters, using a collection agency or litigation - can a CPA firm take against a client who refuses to pay services rendered?


A: Steps a professional services firm could take without resorting to litigation or hiring a collections agency include:

  • Learn why the client refuses to pay. Is it a lack of funds or dissatisfaction with the work?
  • Negotiate with the client in an effort to establish a payment schedule.
  • Tell the client the firm will report them to a credit bureau.
  • Investigate appropriate state(s) laws to ascertain if the firm can place an accountant's lien on the client's paperwork; a few states have amended lien laws to provide accountants with the right to place liens on , or retain, their client's paperwork.
  • Depending on the amount owed, take the client to small claims court.
Chicago attorney Adam Goodman cautions that if the professional services firm's client is an individual – not a business entity – federal and state laws may govern any actions taken. For example, the Fair Collection Practices Act regulates third party collectors, such as collection agencies. Many states have adopted similar consumer protection legislation. "In extreme cases the creditor can be held liable for the misconduct of third party [collection agencies]," Goodman says.



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Q:  What terms are most commonly offered in the United States?


A: According to a TARN survey, the most common terms offered are net 30. Some 61 percent of the participants said they do not offer discounts; 22 percent offered discounts to between 1 to twenty percent of their customers; and six percent offer discounts to between 81 and 100 percent of their customers.

For more details see Benchmarks: Accounts Receivable Processes & DSO.



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Q:  What is count back DSO?


A: Days sales Outstanding (DSO) is used to calculate how long it takes a company to convert its receivables into cash. When a company's revenue is steady and not subject to seasonal sales swings, the standard formula shown below is frequently used:

(Ending Total Receivables / Total Credit Sales) x Number of Days in Period


The count back method for calculating DSO takes into account monthly sales fluctuations, past due receivables and the actual number of days in a month. It is more representative of the flow of receivables and reflects that a majority of an AR balance comes from current sales - not the previous month's sales.

For more information and details see Do You Know Your DSO? and Understanding Your DSO.



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Q:  In my years with B2B collections, I have often heard the word CAPE. It represents the number of accounts an AR rep can manage in their portfolio.

Could you please define CAPE?



A: CAPE is a metric used in connection with collections. CAPE is an acronym for Collection Accounts Per Employee or Customer Accounts Per Employee. The formula used to calculate CAPE is: Number of Active Customer Accounts/Number of Total Collectors.

The resulting number denotes how many active accounts each collector manages. Typically, higher numbers or more accounts managed by a collector indicate an efficient use of employees and technology.

What is a good number? The answer depends on many factors:

  • The credit-worthiness of your customer base; for example are new accounts carefully pre-screened?
  • An account's status; a seriously delinquent account may require longer, more involved calls and attention;
  • A customer's payment history;
  • How the customer's business and/or industry is doing; and
  • Whether you manually make telephone calls or employ an automated dialing solution.



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Q:  My role is new with my firm. I’m developing AR policies and procedures in a professional services environment. We have seen marked improvement, but I feel I am overlooking some variables. Any resources or actual policies and procedures I can obtain to well-round what I have so far would be very helpful.


A: TARN has numerous AR policies, resources and tools that can assist you in your new role. The templates contained in the A/R Tools Suite (third menu section down on the left side of the site) provide a starting point that members can customize according to their needs and work environments.

Select AR Billing Policy Manual, AR Credit Policy Manual, AR Collection Policy Manual, and Disaster Recovery & Business Continuity Templates

You might also find useful the AR Accounting Forms and Checklists , as well as Shared Services Forms and Checklists.



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Q:  What incentive programs for collectors work best?


A: The best incentive programs are simple and do not encourage over-aggressive or unethical behavior. Individual incentives are considered the most effective method of encouraging collectors.

Set realistic targets based on actual cash collected. Don't reward "promises to pay." Avoid negative or claw back programs. Bonuses should be issued monthly or quarterly.

For more information see Incenting and Rewarding AR Collections.



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Q:  How much can we charge on NSF checks?


A: Each state and the District of Columbia have different regulations regarding bad checks. The laws dictate the steps you must follow and total amount of service fees, if any are permitted, you can assess. The regulations also establish civil and criminal penalties that depend on the amounts owed. For example, Delaware caps service fees at $40, while Massachusetts assigns civil and criminal penalties, but doesn't address service fees.

For more information see State Bad Check Service Fee Laws and When You Can't Bank On It.



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Q:  When are the best practices for sending customers past-due statements?


A: What are the best practices for sending customers past-due statements?

Each customer account that has an overdue balance should receive a past-due statement. If possible, the statements should be sent electronically opposed to being mailed. The statements should be sent at 30-day intervals at the same time each month. The statements should document all outstanding invoices, and include the following information:

  • Invoice number(s)
  • Invoice date(s)
  • Due date(s)
  • Number of days past due
  • Amount owed per invoice
  • Total amount owed
  • Where to send payments
  • The collector or letter writer's contact information
For more information see the AR Credit Policy Manual templates


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Q:  Can you please supply information about AR inter-company A/R outstanding items and the rules and policies for those?


A: Mike Iverson, Financial Operations Networks' chief financial officer, says in general, you would use the same approach as you do when working to collect outstanding balances from an arm's length customer who is outside your organization. However, your approach would depend on management's view about collecting inter-company balances. Management should drive the policies and define what is considered an acceptably amount of time to pay a balance among "sister" companies.


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Q:  Should the sales team assist with collections?




A: Understandably, at times credit managers may be "at odds" with the sales team. They have somewhat conflicting goals. Credit managers want to protect the company's cash and manage risk. The sales team wants to sell and acquire new accounts. Frequently, the sales force's first loyalty is to their customers.

However, a sales person can be a very valuable asset in assisting with collections. They know the customer and most likely the conditions causing the customer to become delinquent or pay slowly. If the sales person calls on the customer, the sales person may see signs that a company is experiencing trouble, such as disorganized offices; full warehouses, but little activity; or a recent reduction in staff-valuable intelligence.

Some companies have instituted policies that require sales to help with collections. One of the most effective methods is to issue commissions after the company receives payment - not when the sale is made. The best-case scenario is when credit and sales cooperate and work together to achieve the same goal: boosting their company's bottom line. At some companies, credit managers join sales meetings and assist with training new sales team members.



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Q:  I would like to include dunning letters when mailing out the monthly invoices for my department in order to increase collection efforts. Is this an industry standard practice?


A: We recommend that you continue to send your dunning letters separately from your current invoices. In general, you increase the likelihood of a customer mistake when you send a mailing with more than one purpose.

Dunning letters typically list the invoice information for the invoices they are attempting to collect on. It is common practice for AR to include copies of the listed past-due invoices with the dunning letter, and AP clerks are used to this practice. If you include a dunning letter with new invoices, you run the risk of the AP clerk mistaking the new invoices for the past due invoices printed on the letter.

It is, however, common to send a dunning letter with the monthly statement of open invoices. Doing so allows you to inform the customer of the past due invoice without affecting new invoices.

It’s important to note that your final demand letter should always be sent separately via certified mail to ensure the customer gets it and relay its importance to the customer.




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Q:  Do you have a template or a generic settlement letter which I could send to a customer that would protect our interest?


A: If you have reached a settlement with your customer, it's important that you documented interactions with them and followed your company's collection policy manual guidelines regarding past due statements. TARN's Collection Policy Manual templates include a Customer Account Statement Policy that can be customized to match your company's requirements.

Your communications with the customer, including collection notifications and payment dispute letters, as well as any verbal contacts should be recorded in a collection call log. If the debt was written-off, it should be noted in a bad debt log.

Depending on the settlement terms, you could customize a notice of secured interest or customer past due statement letter. It would be prudent to ask your legal department to review the letter before it is sent.



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Q:  I have been reviewing the State Bad Check Service Fee Laws and need clarification. We are an insurance company located in Michigan. We write business in 6 states. To determine the amount that we are allowed to charge for a returned check (NSF) do I use the amount allowed for Michigan? Or do I need to consider all of the states that we do business and cap the amount based on the lowest amount allowable by the states that we do business.

Example - Michigan allows $25 for returned check fee. Wisonsin only allows $15. Do I use the $25 or the $15?



A: Each state and the District of Columbia legislates penalties and service fees that can be assessed for writing bad or NSF checks. Credit managers who want to collect the monies their companies are owed for NSF checks must adhere to each state's laws. For example, if a bad check writer resides in Wisconsin, the maximum service fee that can be charged is $15. If they live in Michigan the returned check fee is capped at $25.

Although your insurance company is located in Michigan, since you do business in six states you need to know the NSF laws in each of those states to determine the size of the service fee you can legally charge in each state.

States also spell out proper procedures to follow. For example, Ohio requires "proof of delivery." Credit managers attempting to collect money owed on a NSF check from an Ohio resident are required to send the debtor a letter and ask for payment within 30 days. If the payment hasn't arrived at the end of 30 days according to Ohio statues, the check writer has committed a crime. The check's amount determines whether the issuer committed a misdemeanor or felony.

For more information please see When You Can't Bank on it and State Bad Check Service Fee Laws.



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Q:  Are there standard best in class percentages for the various age ranges within an accounts receivable portfolio?


A: Accounts receivable typically represent the largest asset on most companies' balance sheets. Many credit and collection departments prioritize collection efforts based on the age or length of time an invoice has been outstanding.

According to Mike Iverson, the Financial Operations Networks' chief financial officer, a common practice is to segment an AR portfolio into "aging buckets" that are:
  • Current
  • One to 30 days past due
  • 31 to 60 days past due
  • 61 to 90 days past due
  • More than 90 days past due
TARN has developed several tools to assist you with this analysis, including an Accounts Receivable Aging Report, Accounts Receivable Collection Portfolio, and Bad Debt Log. For example, you can use the Accounts Receivable Aging Report to track your customers' payment history. It also assists with analyzing the risk that your customers will not pay.

The percentages of your AR that should be in each bucket are industry dependent, Iverson says. "There is not necessarily a best practice," he says. For instance, in the medical field, some organizations include additional age buckets because it may require 60 to 75 days before payment is received due to the paperwork that must be filed. Conversely, a service business that has a majority of its sales as credit card payments, should have minimal past due amounts.

John Salek, VP Business Services, Genpact, and TARN Advisory Board member, advises segmenting AR portfolios by size, composition, and complexity. Criteria could include number of accounts, number and value of open line items and concentration of receivables. In many companies the Pareto principle or 80/20 rule applies. It occurs when a small percentage of customers, perhaps 20 percent, represent a majority, some 80 percent, of your business.

Salek suggests creating a collection intensity matrix to develop an appropriate collection strategy for each segment. In an example provided in his book, Accounts Receivable Management Best Practices, a company has 1,688 accounts and 191 are responsible for 67 percent of the AR portfolio. Some 492 customers represent 28 percent of AR; 826 accounts provide only 5 percent of the total.

Salek says to develop a tailored approach to each segment. Call frequently the 191 accounts that represent the largest portion of AR and hold periodic meetings with them. They should receive the most attention, perhaps as much as half of a collector's time. The collector should focus about 25 percent of their time on the 492 customers who represent 28 percent of AR.



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Q:  I am hoping to gather an idea to legal liability (if any) of collecting on commercial debt owed to a client of my firm.

I hold a position with a professional services firm - accounting firm - (I head our internal collections and A/R), we have a client (corporation) who is owed monies by one of their clients (also a business). I have provided some minor A/R consultation but have now been asked if I would be able to directly collect on some of the debt owed to our client by theirs.Am I ok to do this as we already represent our client and/or is there any special licensing I would need to collect on our clients behalf?



A: According to attorney Adam Goodman, this is a question of state law. No federal law regulates business-to-business collection. But, some states arguably regulate it, and states and accounting professional associations may regulate the services that accounting firms can offer, and whether those services can be offered across state lines.

The safest course of action would be to obtain input from an attorney who looks into the law of the state of the accounting firm's office, as well as the law of the debtor's state if it is different, says Goodman who is with Goodman Law Offices LLC in Chicago. The accounting firm might also wish to consider whether its malpractice policy covers exposure associated with this activity.

Goodman says it is probably not worthwhile to engage in this activity on a one-off basis. The cost of researching its propriety is too high, and the accounting firm may not do a good job if they aren't experienced in the area. Referral to a full-time business collection agency or law firm might make more sense.

For more information about state regulations, please visit State Collection License Requirements.




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