Winter 2025

As sales are initiated and credit terms are extended to a customer, the general understanding is that payment will come within the applicable terms. Once payment is received and applied to the outstanding receivable, the sales transaction is considered complete. For those in industry, this is the general formula that most transactions adhere to. But what about when a customer does not pay within the terms or, even worse, not at all? The company then must consider the impact to cash flow and the production hours lost working on a sales transaction that should be complete.

Let’s set up an example that shows how a sales transaction could play out.

A customer contacts a business to make a purchase or receive a service. The purchase has a payment provision of net 30 days as the terms of the sale. The 30 days come and go, and no payment is received. The business sends reminders, perhaps in the form of a follow up statement along with phone calls and emails. Each time the customer acknowledges the amount due and indicates they will send payment the next day. This dance goes on for another 60 days, and you soon find you are now three months out from the initial sale.

Most businesses truly want to give customers the benefit of the doubt. There are many good reasons for this, but it is predicated on a trust factor whereby the customer will do the right thing. We want to build customer loyalty and have a positive word of mouth spread. Sometimes, though, customers have situations come up that may prevent them from paying within the terms. Other more pressing expenses can unexpectedly be incurred, or maybe they were sidetracked and it slipped their mind to pay by the due date. These are normal situations that can happen over the course of a week or month, and it makes it difficult to ascertain when a company should be concerned. Still, sometimes, there are just bad actors out there. For these reasons, it is important to have sound business practices and built in follow-up contact points.

At some point, a company will be faced with the question: Is now the time to use a collection agency to assist in the collection process? Having to make this decision is not easy. It has consequences both internally and externally.

Internally, there is an administrative burden to prepare a packet for the collection agency to improve its chance of success in collection. The main detractor, though, is the economic hit to the receivable since there is a percentage that will never be recovered by the company as a result of the cost to utilize the collection agency. After all, they are in business themselves and are trying to resolve an already complicated situation.

Externally, there could be backlash from the customer because of the perceived stigma that comes from being sent to collections. The approach from a collection agency would typically be to reach out to the customer by letter, email, or phone call to work out payment on the amounts due. This can often be met with resistance and outright refusal by the customer. First, it is not the company they did business with; second, the collection effort has removed the need for the positive traction that can come from the company where other factors come into play (marketing, customer loyalty, repeat business, etc.).

When all is said and done, though, working with a collection agency is an important tool to have available, but a business should exhaust all internal options first. If possible, try to develop your own payment arrangement with the customer. It might help you save the relationship as your flexibility may put them at ease. Having the option to handle late payments internally saves money (no haircut on the receivable for sending to collections). It is also critical to be open and up front with your clients surrounding the terms of the receivable at the time of purchase. Sales agreements and/or terms are the best way to spell this out and also allows you to inform the customer up front that this route is an option for nonpayment. This clears the space just in case it is ever needed when the time comes.

In advance of aligning yourself with a collection agency, do the necessary research before you elect to partner with one of these agencies. Having comfort with their operating procedures and an understanding of the arrangement makes it easier for both sides to incorporate this into policies and procedures. Your company should also establish and adhere to a regular cadence on when aged items are sent to the collection agency. The longer you wait, the colder the trail can be and the harder it can be to ultimately recover the amounts owed to you for the goods and services provided. The right partnership with a collection agency will create an efficient and effective way to collect wayward receivables.

Whether or not you do decide that a collection agency is the right next step for your business, please remember that we never know what someone is going though. Being sensitive to your customers’ personal situations is key. It is always good to stress to your customer that it causes no ill feelings, and try to end the relationship on a positive note. Showing sympathy goes a long way in turning a bad experience into a good one.

Michael F. De Stefano, CPA, is chief operating officer for RKL in Lancaster and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at mdestefano@rklcpa.com.

Annette Carr is accounts receivable specialist for RKL in Lancaster. She can be reached at ascarr@rklcpa.com.

As sales are initiated and credit terms are extended to a customer, the general understanding is that payment will come within the applicable terms. Once payment is received and applied to the outstanding receivable, the sales transaction is considered complete. For those in industry, this is the general formula that most transactions adhere to. But what about when a customer does not pay within the terms or, even worse, not at all? The company then must consider the impact to cash flow and the production hours lost working on a sales transaction that should be complete.

Let’s set up an example that shows how a sales transaction could play out.

A customer contacts a business to make a purchase or receive a service. The purchase has a payment provision of net 30 days as the terms of the sale. The 30 days come and go, and no payment is received. The business sends reminders, perhaps in the form of a follow up statement along with phone calls and emails. Each time the customer acknowledges the amount due and indicates they will send payment the next day. This dance goes on for another 60 days, and you soon find you are now three months out from the initial sale.

Most businesses truly want to give customers the benefit of the doubt. There are many good reasons for this, but it is predicated on a trust factor whereby the customer will do the right thing. We want to build customer loyalty and have a positive word of mouth spread. Sometimes, though, customers have situations come up that may prevent them from paying within the terms. Other more pressing expenses can unexpectedly be incurred, or maybe they were sidetracked and it slipped their mind to pay by the due date. These are normal situations that can happen over the course of a week or month, and it makes it difficult to ascertain when a company should be concerned. Still, sometimes, there are just bad actors out there. For these reasons, it is important to have sound business practices and built in follow-up contact points.

At some point, a company will be faced with the question: Is now the time to use a collection agency to assist in the collection process? Having to make this decision is not easy. It has consequences both internally and externally.

Internally, there is an administrative burden to prepare a packet for the collection agency to improve its chance of success in collection. The main detractor, though, is the economic hit to the receivable since there is a percentage that will never be recovered by the company as a result of the cost to utilize the collection agency. After all, they are in business themselves and are trying to resolve an already complicated situation.

Externally, there could be backlash from the customer because of the perceived stigma that comes from being sent to collections. The approach from a collection agency would typically be to reach out to the customer by letter, email, or phone call to work out payment on the amounts due. This can often be met with resistance and outright refusal by the customer. First, it is not the company they did business with; second, the collection effort has removed the need for the positive traction that can come from the company where other factors come into play (marketing, customer loyalty, repeat business, etc.).

When all is said and done, though, working with a collection agency is an important tool to have available, but a business should exhaust all internal options first. If possible, try to develop your own payment arrangement with the customer. It might help you save the relationship as your flexibility may put them at ease. Having the option to handle late payments internally saves money (no haircut on the receivable for sending to collections). It is also critical to be open and up front with your clients surrounding the terms of the receivable at the time of purchase. Sales agreements and/or terms are the best way to spell this out and also allows you to inform the customer up front that this route is an option for nonpayment. This clears the space just in case it is ever needed when the time comes.

In advance of aligning yourself with a collection agency, do the necessary research before you elect to partner with one of these agencies. Having comfort with their operating procedures and an understanding of the arrangement makes it easier for both sides to incorporate this into policies and procedures. Your company should also establish and adhere to a regular cadence on when aged items are sent to the collection agency. The longer you wait, the colder the trail can be and the harder it can be to ultimately recover the amounts owed to you for the goods and services provided. The right partnership with a collection agency will create an efficient and effective way to collect wayward receivables.

Whether or not you do decide that a collection agency is the right next step for your business, please remember that we never know what someone is going though. Being sensitive to your customers’ personal situations is key. It is always good to stress to your customer that it causes no ill feelings, and try to end the relationship on a positive note. Showing sympathy goes a long way in turning a bad experience into a good one.

Michael F. De Stefano, CPA, is chief operating officer for RKL in Lancaster and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at mdestefano@rklcpa.com.

Annette Carr is accounts receivable specialist for RKL in Lancaster. She can be reached at ascarr@rklcpa.com.