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Invoice Collection Letter

When customers owe you money, the sooner you can get your hands on it, the better. A good practice is to send an invoice collection letter as soon as your invoice becomes overdue. Before you do so, familiarize yourself with the collection process and review the best practices for debt collection.

What Is an Overdue Invoice Collection Letter?

This formal letter notifies customers that they failed to make a payment on their outstanding balance. While you can send a physical letter to accomplish this, many companies also use emails and text messages. Letters and emails tend to provide better documentation should you need to show proof of reasonable attempts to collect on the debt.

What Is the Invoice Collection Process?

Each business should design a debt collection process that meets its needs. Before doing so, consider the basic steps of the process and then make adjustments where necessary. The most common steps in the collection process are as follows:

  1. Identifying the outstanding debt.
  2. Attempt to collect payment from the customer.
  3. Send a payment collection letter or several.
  4. Take additional action if necessary.

What Are Some Benefits of Issuing an Overdue Invoice Collection Letter?

The best time to create a debt collection strategy is before extending any credit to customers. However, if you still find yourself on the fence about getting started, reviewing the benefits can help. These are some of the many reasons businesses use debt collection letters:

  • It shows you are serious about getting paid.
  • It puts the customer on notice that they need to take action.
  • It provides a timeline for when payment is due.
  • It can help avoid small claims court or other legal action.
  • It ensures you can substantiate claims of reasonable attempts to the IRS and other agencies.

What Are Some Best Practices for Debt Collection Letters?

No one knows your customers better than you do. For example, will they respond more favorably to threats of late fees or promises of discounts for early payments? Take the time to review your business relationships to determine what works for you. Use these best practices as your starting point.

  • State the invoice number and amount owed in the collection letter.
  • Include the date of the original invoice.
  • Explain what will happen if the customer doesn’t pay, such as late fees or collection letter legal action.
  • Request payment within a specific timeframe, such as 30 days.
  • Offer a discount or delay late fees for timely invoice settlement.
  • Include your contact information in case the customer has questions.
  • Automate the process to reduce errors and increase efficiency.
  • Familiarize yourself with consumer protection laws for individual debtors.

When Should You Consider Collection Letter Legal Action?

When customers refuse to pay, it can put your business in a difficult situation. This becomes even worse if multiple customers default on payments concurrently. Is taking legal action the right solution to this problem? That depends on your business, your customers, and the money owed.

Here are some appropriate situations:

  • You have a longstanding relationship with the customer.
  • The debt is large, and you need to send a strong message.
  • Your state’s statute of limitations is about to expire.
  • You’re confident that you will win the case and obtain payment.
  • You suspect your customer might soon file for bankruptcy.

The Bottom Line

No company wants to hassle or chase its customers for payments. Consequently, a good debt collection strategy begins with reducing the risk of late payments and default. Strategies to accomplish this include reviewing creditworthiness and making adjustments based on payment histories.

Even with the best strategies, some customers might default. So, establish a solid invoice collection process and leverage automation to lighten the load. By following these tips, you can secure the cash you need to keep your business running smoothly and avoid disruptions to operations.

Those that are familiar with the workforce management space need no introduction to Monday.com and its powerful work OS tool. Monday.com recently moved to an automated accounts receivable (A/R) collection system, powered by Gaviti, to replace its outdated annual reporting methodology.

From Monday.com’s accounts receivables department:

With our business and sales growing exponentially, Gaviti has been a key tool in ensuring our DSO has not only stopped increasing but also shown improvements over a relatively short period of time. The ease of use combined with a highly responsive and helpful team… We have been able to quickly implement a comprehensive and versatile collections process.

When you stop to consider the broader, organizational benefits of automated A/R solutions, it’s easy to understand why Monday.com was so successful. The right A/R collection software can improve cash flow as well as the performance of key metrics – such as days sales outstanding (DSO) – within your organization.

Improve DSO Collection Processes

At its core, DSO collection is a cash flow problem. According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management.

Part of this issue is attributable to the time-consuming processes inherent in manual collections. DSO collections and cash flow already vary from month to month. When you add the time spent managing spreadsheets across late payments, grace periods, and lines of credit, you have an untenable system where staff spends more time corralling reports than processing payments. And while you may not enjoy managing the nitty-gritty details of your business’s finances, your financial processes are ripe for optimization. Consider just a few ways that accounts receivable collection software can streamline your enterprise DSO:

  • Collect on accounts when they’re due with automated customer reminders
  • Create a single source of truth with a centralized A/R database that eliminates the need for tracking/compiling across different spreadsheets
  • Faster invoicing through the elimination of unnecessary payment delays
  • Standardize your process for consistent, repeatable collections every time
  • Streamline payment collection for clients, decreasing the odds of entry errors and making it more likely you’ll get paid on time

When you work to improve your accounts receivable collection, you’re working toward a healthy financial process where DSO stays low. But that’s not the only benefit of an A/R collection solution.

Stay Informed

5 Benefits of Automated Accounts Receivable Collection

In any discussion about the benefits of accounts receivable automation, it’s important to cover the broader benefits it provides:

  1. Better staff efficiency by reducing the manual hours required to perform collections tasks – all those hours you spend chasing invoices, calling clients, or writing follow-up emails add up.

  2. Ensure your data’s accuracy – real-time accurate data will prevent your company from making errors.

     

The benefits of the accounts receivable collection software are clear, and once you’ve deployed
automation,
you’ll have a hard time going back.

A/R Collections Best Practices

Although automated accounts receivable software brings a new dimension to your financial processes, the fundamentals of accounts receivable best practices remain the same. It’s a straightforward process that nevertheless tends to get bogged down by inefficiency. This is where automation software pays off.

Consider how you can leverage financial technology like this throughout your organization to improve key financial metrics. Technology is one option. Outsourcing accounts receivable collections to a service provider that can handle all the details for you is another. You have plenty of options, and now it’s just a matter of selecting which improvements will yield the best results for your enterprise.

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