As a management consultant I see many different businesses but in most cases the problems are the same. In the over 50 clients I worked with over the past three years, not one did not have a problem with accounts receivable (AR). (Receivables are those invoices for work or services you have performed or delivered, but have not yet been paid.) The common response to the question was “They are such a good customer, we don’t want to upset them.”
My response to that is “Why should it upset them if you ask for your money”. But be that as it may, the real issue is that getting paid is part of the job. It is part of customer service and if it is viewed that way it is so much easier. The key therefore is not to wait till an invoice is past due, by then it is getting too late. Before due date make a customer service call and ensure there are no problems.
If you do that, when the invoice becomes due, there are no excuses for it not to be paid.
One thing that may change business owner’s attitude would be if accountants change the way they deal with bad receivables. Most often it is deducted from the top line – sales, giving the impression it is just another sale not done. It would be better if it went right down to the bottom line and be deducted from profit. The result is the same, but it reinforces the truth that a bad debt comes right out of the owners back pocket.
Operating an effective AR program will reduce your loss from bad receivables, but sometimes you get the people who appear to have the money but just won’t pay. Once you have tried everything else and failed, you can get a small satisfaction. The Internal Revenue Service consider discharged debt as taxable income to the individual who gains economic benefit from it.
So what you do is inform the debtor that the money they owe will be reported to the IRS in the form of a 1099-Misc. and it will be their responsibility to pay the appropriate taxes. Often this brings a speedy response.
