Extending credit to your customers is a great way to build relationships, boost sales, and generate new business, but there are also risks with doing this. Each time you extend credit to a customer, you are increasing your accounts receivable account and must wait for your money to come in. While this can work out great with most customers, there may also be times when your customers fail to pay.

What is accounts receivable?

Accounts receivable is an asset account that represents the amount of money your customers owe you for goods or services they already received but have not yet paid for. This account is considered a current asset, as the money is expected to come in within the next year, and it is an account that can fluctuate daily. If you currently offer credit lines to customers, it is important to keep an eye on this account, simply to make sure your customers are paying you.

What happens when customers fail to pay their bills?

While you may not have any problems with most of your customers paying their bills in full by their due dates, there may always be a couple of accounts that fail to pay their debts when owed. Because of this, you will need a system in place for the purpose of trying to collect these debts.

For example, when a customer misses the due date, you may send a letter or email to remind the person, as this might be an honest mistake. When the debt is thirty days late, you may also send a letter and make a phone call. When the debt is a certain amount of time past due, such as ninety days or longer and the customer is not making any attempts to repay the debt, you may need to have a collection process in place.

How does the collection process work?

For those few customers that do not pay their bills, you must have some sort of system in place that will help you collect the debts. You could do the collection process yourself, or you could hire a company that specializes in business collection services. In any case, you may never receive the full amount owed, but you are likely to receive at least a portion of it.

Developing a good approval process for credit lines can help you avoid accounts like this, but there is no way to prevent this completely. If you would like help with this issue, contact a company that offers accounts receivable management services.