How to Handle Delinquent Accounts in Accounts Receivable

What is a delinquent account? 

Within an accounts receivable (A/R) context, it’s a customer account where the buyer has missed at least one payment due date. These due dates should be identified within the payment terms of an outgoing invoice, typically falling 30, 60, or 90 days after the invoice date.

Given the severity of the delinquency — or the amount owed — most organizations will pursue additional measures to recoup the outstanding funds, such as charging late fees, working with third-parties to collect on the debt, or even engaging in legal action. Of course, some businesses do not internally consider an account to be delinquent — meaning that they don’t take additional action — until after a given grace period.

Delinquent account example 

In a personal context, it’s relatively easy to imagine what an overdue account might look like from the buyer’s perspective. For instance, you might have forgotten to take care of a utility bill or make a student loan payment before the due date. If you neglect to follow up on these owed amounts, you’ll likely begin receiving notices from collections companies, and you can expect a drop in your overall credit score. 

To explore the situation from a seller’s perspective, however, let’s consider Hippie Hops, a craft brewery that makes a variety of hemp-, sage-, and patchouli-infused beers. Every month, the business sends out multiple shipments and invoices to its four retail partners: The Tapped Keg, Bottled Bliss, The Thirsty Merchant, and Randal’s Liquor Liquidators. At the end of each month, Hippie Hops creates an A/R Aging Report to determine the status of its outstanding debts. For the month of March, the report looked like:

Of its four customers, two of them currently have delinquent accounts. While Bottled Bliss has three outstanding payments due, Hippie Hops is not treating this customer as delinquent. After all, Bottled Bliss has built a long-standing relationship with the brewer and a steady payment history. Its current delinquency is due to a cash crunch that will be resolved next month. Conversely, Hippie Hops has taken a more aggressive approach with The Thirsty Merchant, who has only made purchases since last fall. These actions include additional reminder notices and the accrual of late fees.

What are the causes of a delinquent account? 

In all honesty, there are far too many potential reasons for us to make a comprehensive list. Sometimes, the buyer simply acts in their own best interest. Sometimes, the tardiness is caused by a simple oversight. Or sometimes, the reason is more nefarious. Commonly, though, it will be caused by:

• Cash problems: When a buyer doesn’t have sufficient cash to make their payment — whether due to economic downturn, overextension, or their delinquent customers — you’ll likely be waiting a while before you see any funds.
• Disputes: If there are any disagreements related to the goods or services you delivered or the accompanying invoice, don’t expect to receive any payments until these underlying issues are resolved.
• Forgetfulness: Not every delay is intentional. Sometimes, particularly with smaller companies that rely on manually driven accounts payable (A/P) efforts, the problem is simple: human oversight.
• Fraud: While less common, some “buyers” never intended to pay you in the first place.
• Misunderstandings: If your payment terms are ambiguous, don’t be surprised when your customers choose the interpretation that is most favorable to them.
• Payment failure: Technical errors can also disrupt timely payments. For example, if your customer is trying to purchase with a credit card on file featuring an expiration date that has already passed, the card provider will cancel the transaction.

How delinquent accounts impact your accounts receivable 

As previously mentioned, when these late or missing payments stack up, it can have a number of downstream effects on your financials, costing you additional time, resources, and labor. For example, overdue accounts commonly will:

• Cripple your cash flow, making it difficult to maintain current operations, respond to market opportunities, or plan for the future
• Increase your bad debt, leading to clear financial losses
• Sour customer relationships, leaving you unlikely to work with existing customers in the future and vice versa
• Extend the invoice-to-cash (I2C) cycle, tying up revenue unnecessarily
• Increase your processing cost per invoice, boosting overhead and shrinking profits
• Undermine creditworthiness, causing your business to appear less attractive and financially stable to investors, suppliers, and other stakeholders

How to handle delinquent accounts

Just as there are a myriad of reasons why an account might be delinquent, there are a myriad of strategies that you might employ to limit the likelihood of — or the potential damage caused by — these payment delays. However, specific approaches tend to have a broader impact on protecting your bottom line, particularly those aided by modern software like our Accounts Receivable Automation platform. 

Embrace automation

The sooner your customers receive an invoice after making a purchase, the more likely they will pay quickly. Human errors, however, and the associated payment disputes they cause can seriously disrupt those timelines. Fortunately, automation can help prevent these mistakes.

For example, if you rely on manual transcription to create your invoices, don’t be surprised when certain inaccuracies creep into the details of these critical documents. However, with an automated billing workflow that leverages broad integration capabilities to pull data directly from your enterprise resource planning (ERP) platform, you can eliminate the potential for these roadblocks.

Similarly, our platform’s Smart Chasing AI feature can help establish consistent dunning efforts, meaning that your customers will be repeatedly made aware of their obligations before they’re due and even after. All of these touches can be driven without direct human intervention.

Be consistent

If different staff members address these challenges with varying strategies at other times, you can expect quite a drop in efficiency for your A/R efforts. At the same time, when buyers don’t know or understand how you’ll react or what you expect from them, they’re much less likely to behave in the manner you desire.

From the start, establish clearly defined payment terms that dictate when and how they should send you money. Even better, ensure that potential buyers know and understand these expectations before any purchase is processed and reiterate them with every communication throughout the entire payment cycle.

Of course, not every situation — or customer relationship — will be the same, so you’d be wise to build some flexibility into these efforts. However, any process deviations should be restricted to specific situations and require the approval of key staff.

Simplify payments

The easier you make it for your customers to give you their money, the more likely they will do so. As such, you should accept as many payment options as possible. If a buyer can use their preferred method (e.g., credit card, check, wire transfer), they’re more likely to close out their invoice quickly.

To help open up options for our platform, we rely on the capabilities of our parent company, Flywire. Their software makes it easy to handle payments in 140 global currencies, and users can also leverage Flywire’s capabilities as a payment gateway.

Further, we also deliver a self-serve payment portal that allows end customers to manage their payment details easily, set up AutoPay functions, and initiate transactions — all from a single interface.

Open the lines of communication

Your customers should never be surprised when a due date rolls around. Instead, throughout the purchasing process, you want to constantly communicate with them, reminding them of their upcoming obligation. If the due date passes, the reminders should continue until full payment is received.

Of course, sending too many dunning notices can transform these touches from helpful prompts into general nuisances. So we typically suggest a cadence of once a week at most. As we’ve already recommended, automating these efforts can ensure process consistency with relatively little effort.

We also recommend that you create standard templates that are professional, empathetic, and clear for all text communications. When making phone calls, employ a collections call script.

Look at the numbers

From a financial standpoint, there are quite a few key performance indicators (KPIs) that you should be paying attention to. And when carefully monitoring those tied to the efficiency of your A/R and the timeliness of incoming payments, you’ll be in a much better position to identify process bottlenecks and other potential issues.

Some metrics you should definitely track include:

• Average collection period
• Average days delinquent (ADD)
• Bad debt to sales ratio
• Collections efficiency index (CEI)
• Cost per invoice
• Day sales outstanding (DSO)

 Ideally, you’ll gather these details — and others — into ongoing reports that let you monitor progress over time. Our platform, for instance, offers dozens of pre-built reports along with an Advanced Reporting add-on that lets you compile data from across hundreds of objects and field types for your own personal analytics efforts.

Resolve disputes quickly

As previously mentioned, disputes are a common cause for payment delays. If your business received an invoice from a supplier that contained inaccurate delivery details or incorrect pricing, you’d likely want those discrepancies addressed before proceeding. Of course, sometimes customers are willing to pay the outstanding sum quickly — that is, if the error is in their favor.

Businesses often make it complicated to report a problem with an outstanding invoice. Or when those complaints are received, they don’t prioritize researching and resolving the discrepancy. So, to minimize the disruption caused by delinquent accounts, you should address these issues as quickly as possible.

To help facilitate this, the self-service payment portal bundled with our platform, which we previously mentioned, allows end customers to ask billing-related questions with minimal effort. These notifications, in turn, are made immediately available to accounting staff, empowering them to seek a prompt resolution.

How to prevent delinquent accounts 

Whatever measures you choose to put in place to handle these delinquent payments can’t and won’t prevent them from ever occurring. So, you should constantly revisit the efficiency and overall success of the above operations and evaluate alternate strategies. Some additional measures that we recommend you consider include:

• Offering customer payment plans that let buyers, including those with a delinquent account, break up the cost of their purchases over time
• Running credit checks on first-time customers to evaluate the potential risk of offering credit to them
• Adapting your communications to use a multi-channel strategy, delivering simultaneous touches via phone, text, and email
• Performing A/B tests on new processes and strategies, evaluating their performance metrics to determine what is and isn’t working
• Offering early payment discounts as an incentive
• Instituting late fees or other penalties — such as limiting purchase sizes — until all delinquent invoices have been closed

Get paid early and often with Invoiced 

When it comes to delinquent accounts, you have many options for addressing them. However, some of the most efficient and cost-effective strategies are built around technology. And with our Accounts Receivable Automation platform, you’ll be well-positioned to sidestep many of the pervasive consequences caused by overdue invoices.

With limited effort and our software, your A/R operations and staff will be able to accommodate the most complex invoicing situations, delivering clear, concise, and immediately actionable payment notices. When you’ve removed all of the roadblocks in front of your customers, they’re much more likely to pay you quickly.

See what Invoiced has to offer your A/R staff, your business, and your bottom line, and schedule a demo today.