How collections runs, step by step

Collections runs as a loop. Policy sets the rules. Cash application clears what has been paid. Analysts sort what remains overdue, and collectors work those accounts. Finance then decides what to adjust, write off or push into recovery. Each payment that arrives changes the next worklist.

The steps in order

1. Set the policy for delinquent accounts. The controller or head of credit drafts it, and finance leadership approves it. The policy defines when an invoice counts as overdue and how aging buckets are cut. It also sets when interest or penalties accrue and who may approve a write-off at each level. Collectors cannot act consistently without it.

1. Apply incoming cash. The cash application team or receivables clerks deposit checks and record electronic receipts. They match each receipt to an invoice and a payer account. Anything unidentified gets parked in suspense and researched until an owner is found. Where policy or law requires it, partial payments go to penalties, then administrative costs, then interest, and only then to principal. A returned check reverses the credit and reopens the balance. This step comes before analysis so nobody chases a customer who has already paid.

1. Analyze delinquent balances. A collections analyst runs the aging report and segments accounts by size, risk and dispute status. The output is a prioritized worklist. Large balances and customers with a history of broken promises usually rise to the top.

1. Contact and negotiate with the customer. Collectors send reminders and make calls. They agree payment plans and log every promise to pay with a follow-up date. Firmness rises as the account ages. A good collector also listens for the reason behind non-payment, because that reason often points somewhere else in the business.

1. Settle disputes with internal parties. Many overdue invoices are not credit problems at all. The customer may be waiting on a missing delivery, a pricing correction or a credit promised by a salesperson. The collector takes these to sales, billing, customer service or legal. Each claim is either confirmed or rejected, and the outcome is recorded on the account.

1. Post adjustments and write-offs. A receivables accountant posts credit memos for valid disputes and write-offs for balances judged uncollectible. Each entry needs sign-off from someone holding the right level of authority. Write-offs draw down the bad debt allowance, so the general ledger team reviews them at period end.

1. Run a recovery workout. For larger troubled accounts, a credit manager or senior collector negotiates restructured terms. Options include extended schedules, security over assets, settlement for a reduced amount, or a hold on new orders until the arrears are cleared. Legal often reviews the agreement before anyone signs.

1. Manage accounts in default. When a workout fails or the customer stops responding, the credit manager and legal decide the next move. That may be referral to an outside agency, litigation, offset against amounts owed to the customer, or a permanent credit block. Recoveries on balances already written off still arrive occasionally. They must be posted as recoveries so the allowance stays accurate.

Receivables from related or government entities

Balances owed by affiliates or by other government bodies rarely go through dunning. They settle through reconciliation. Staff compare orders against performance and settlements against open receivables. They then share that detail with the counterparty so both sides agree on the figures. Treating these balances like ordinary trade debt usually produces friction and little cash.

Questions to ask the people who run it

The documented process and the daily one tend to drift apart. These questions help surface the gap:

• When a payment arrives without a remittance, what actually happens to it, and who ends up researching it?
• Does anyone pull paid or disputed invoices off the worklist before the calls start, or do collectors find out on the phone?
• Which customers are never chased, and who decided that?
• How do salespeople find out their account is overdue, and do they ever ask collectors to hold off?
• What does a collector do when a dispute sits with another department and nobody answers?
• Are write-offs approved before they are posted, or signed off afterwards in a batch?
• Is there a spreadsheet or inbox that holds information the system does not?
• When a payment plan is agreed, who checks that the instalments arrive?
• How are returned checks spotted, and how quickly does the customer hear about it?
• What happens to an account after it goes to an outside agency, and who reconciles what the agency reports?
• Which part of the policy do people work around most often, and why?

The answers to the last question usually show where a change will meet resistance. They also show where the policy itself needs rewriting before any new tool or team structure goes in.

APQC's Process Classification Framework® (PCF) is an open standard developed by APQC, a nonprofit that promotes benchmarking and best practices worldwide. To download the full PCF or to view definitions and measures, please visit www.apqc.org/pcf.