Art of Accounting: Collecting or managing ‘dead’ accounts receivable

Every business has some dead accounts receivable on its books. Reviving them might not be worth the effort but managing them might be.

Any business that lets past-due accounts receivable accumulate is not being managed well. There might be legitimate reasons for a few past-due clients, but there is no excuse for a large number of unpaid invoices. This creates a twofold problem: first, getting paid the past due amounts and second, how or whether to continue with the ongoing work. Here are some suggestions:

As far as the past-due amounts, there is a reduced likelihood of getting them paid completely and in a reasonable time. Further, if you terminate the relationship, you will lose the future revenue you could have received. Logic says that the client will need to engage another accountant for those services and presumably will pay for those services. You’ve already lost the previous revenue, but why should you give up on the future revenue?

A suggestion is to negotiate fees for the ongoing work and have them paid in advance. Most work is done on a regular basis and there is a very small gap between agreeing to do the work and completing it. Getting paid in advance is not such a disadvantage to the client, but it is a guaranteed way to not have the accounts receivable balance increased. If the client will not agree to this, then it’s not a client on which you should waste another minute of your life.

As far as the past-due balances, tell the client that he or she would also need to add 10% to the fee for any new services that would be applied to the past-due balance. Further, when the past-due payments under this method accumulate to 50% (or whatever amount you think appropriate) of the past-due accounts receivable, you will cancel the balance. Hey, keeping the client and getting paid half of the past-due balance is a lot better than not keeping the client and not getting any of the past-due balance.

I know you are angry at the client for “sticking” you, but I place the blame on you for being neglectful and not dealing with this in a timely manner. Also, why not try to salvage the relationship by continuing with the current work and getting something?

Suing the client is usually not a good strategy since the client likely would not have the money to pay you should you be successful in your lawsuit. Furthermore many clients that are sued enter a counterclaim of incompetent work and that would need to be defended and turned over to your malpractice insurance carrier, who usually would want to settle, with you getting stuck for the deductible amount. Plus you will be forced to devote considerable time to this “self-created” nonsense.

Use the above as a suggestion to consider. Also use this as a wakeup call to not let past-due balances get out of hand. 

Do not hesitate to contact me at emendlowitz@withum.com with your practice management questions or about engagements you might not be able to perform.