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Collections Best Practices
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receivable that are outstanding for a long time period will require a number of
collection actions, whereas one that is paid immediately will not require any;
thus, the use of an early payment discount reduces the cost of collections.
The discount is an easy one to implement. A company usually prints the dis-
count on its invoices so that customers will see the discount the next time an
invoice is mailed to them. However, most customers already have payment terms
included in their payment databases and a sudden change in terms may not be
noticed. Accordingly, it may be necessary to call the customers’ accounts payable
staffs to notify them of the change. An alternative approach is to offer the dis-
count only to a few key customers that represent a high volume of sales or who
are constant late-payers. By reducing the number of customers who take dis-
counts, a company can make more selective use of this tool.
There are three problems with using an early payment discount. One is the
cost. To entice a customer into an early payment, the discount rate must be fairly
high. A common discount rate is 2 percent, which translates into a significant
expense if used by all customers. Another problem is that it is somewhat more dif-
ficult to apply cash against accounts receivable if a discount is taken. Depending
on the facility of the accounting software, an accounting clerk may have to go to
the extreme of manually calculating the discount amount taken and charging off
the difference to a special discounts account. Finally, a discount can be abused. If
a customer is already stretching its payments, it may take the discount rate without
shrinking its payment interval to the prescribed number of days. This can lead to
endless arguments over whether the discount should have been taken, which the
customer will win if it makes up a large enough percentage of a company’s sales.
Granting early payment discounts can significantly reduce the amount of a
company’s overdue accounts receivable, but this is at the high cost of the discount,
which can be abused by some customers. Accordingly, this best practice should be
used with care to improve the payment performance of selected customers.

Cost: Installation time:

7–4 CONDUCT IMMEDIATE REVIEW OF
UNAPPLIED CASH

It is a common occurrence for a collections person to call a customer about an
overdue invoice, only to be told that the check was already sent. Upon further
investigation, the collections staff finds that, for a variety of reasons, the errant
check has been sitting in an accounting clerk’s ‘‘in” box for several weeks, wait-
ing to be applied to an invoice in the accounts receivable aging. Common reasons
for not performing this cash application include not having enough time, not
understanding what the check is intended to pay, or because there are unex-
plained line items on a payment, such as credits, that require further investigation
before the check can be applied.