During discussion with my colleagues in finance and accounts function, I came to know about the issues faced by the organization due to payments not made by clients. This creates lot of hardship as cash flow planning goes for a toss. Follow up on the receivable adds to the cost of finance and overall it creates a bad test for the organization and its client.
My observation in general is that, accounts receivable process in the organizations is reactive. When organization finds out nonpayment of dues from client, soft follow up is started. Follow up gets intense as outstanding ages. Client keeps on prolonging the payment on some or the other pretext. Sometimes after rigorous follow up or legal threats client agrees to pay and most of the time organization agree to the discounts asked by the client. Getting some money than nothing is better, everyone thinks.
This creates bad taste for both and organization is impacted. They have spent money by deploying resources on the project and returns on the cost incurred are meagre. Profit margins dwindle and it impacts overall profitability as well.
I think following approach will help to reduce this problem to some extent:
- Person responsible for AR should get involved in the project kick off meeting and record payment milestones mentioned. This person must have payment milestones identified in the contract and map them with milestones being discussed in the kick off meeting. Any discrepancy must be sorted out immediately.
- AR person should coordinate with the project manager/coordinator and ensure that payment milestones are part of the delivery schedule. Discuss and enforce on project team the importance of the payment milestones.
- Identify the deliverables (Documents, requirements, modules, features etc.) associated with the payment milestones.
- Ensure with the project manager/coordinator, that these deliverables are part of the milestone deliveries.
- Ensure with project managers that payment milestone deliveries have happened on the committed date.
- Ensure that the invoice is generated once milestone is delivered.
- Book a reminder in your calendar for follow up with client on the payment, as per payment terms.
- Get appraised from project managers about client feedback, appreciation, complaints about the milestone delivery. Client will use concerns/issues, if any, to delay the payments.
- Prepare yourself with answers for the tough questions, concerns/issues client throws at you, in your follow up calls. As far as possible involve project managers or relevant stakeholders in the call with the client.
- Keep following up with project manager/coordinator to resolve the issues in the milestone delivery, if any. If they are not able to resolve, escalate and get a confirmed commitment/ plan for resolution. This will help you in your follow up calls with client.
- Keep regular follow up with client as per the decided frequency. Remember you are relationship and not receivable person. Client should not neglect or put down your calls.
- Always provide confidence to the client on resolution of issues if any. Ensure project managers and coordinators stick to the resolution plan. If they do not, escalate.
- Provide status (MIS) on receivables regularly.
- Escalate outstanding beyond 60 days as the project is already in 90 days of negative cash flow and get decision from senior management on continuation of the project.
- Prepare client for the hard decision (discontinuation), if taken. Convey decision to the client.
- If decision is to continue rigorously follow up and keep escalating.
I think few steps that came to my mind are narrated here. You can modify them as per the conditions you are operating in. This is very important activity and is influenced by many outside factors, which are not within your control. However disciplined and consistent efforts considering above steps can yield better results.
