Turn Unpaid Receivables Into Cash

 

The bottom line could have looked better, but you did not collect those unpaid receivables.  You are not satisfied with your company’s profits, and now, you feel that you are stuck with those results.  With help from your attorney, you can collect your unpaid receivables and improve the company’s earnings.

 

The 90-Day Golden Rule.  If you do not receive payment within 90 days, your customer’s business has serious problems.  The legal definition of “insolvency” is a company which is unable to pay its bills within 90 days.  So, accounts that are more than 90 days “past due” probably need legal attention.

 

A Vital Function.  Lack of cash flow can kill an otherwise successful company.  You cannot pay the bills without money in the account.  Your company is likely paying money on a credit line to finance the debtor, and these finance charges do nothing to collect.  Making the sale and doing the work are not enough: you must get paid.

 

Set Goals and Get to Work. Collection needs to be a regular business function.  Smart companies have collection meetings—involving high-level management—on a weekly basis.  At these meetings, regional leaders with unpaid accounts get to squirm in front of their peers.  Train employees, especially in sales, to spot and report red flags and potential bad debt. Quarter over quarter improvement (in amounts collected and speed of collection) are the principal goals. 

 

The Schedule (Days 35-85).  Collection calls and letters from the company should start at around 35 days past due.  Between 35-85 days past due, there should be about four attempts made to collect the debt.  If there is a notice of breach provision in the contract, it may be advisable to provide notice during this period.  The fourth attempt, at around 75-85 days, should be made by the CFO or CEO.  This will leave no doubt that the situation has escalated.  Also, the C-level exec may be able to identify and resolve customer service issues that have not been properly addressed. 

 

What to Do at 90 Days.  At around 90 days, your commercial collection attorney should contact the delinquent customer.  The first communication may be a relatively non-belligerent call.  For example, “Hi.  This is Attorney, and I represent Your-Supplier.  Your-Supplier has asked me to contact you because Your-Company is 90-days past due.  I show the amount owed as $_______.  Can you confirm that amount?   I want to make sure this gets paid ASAP.  You should go over your situation and get back to me in the next few days, with a realistic payment plan which you are able to stick with.  My client likes you and wants to keep working with you but only if payment is made.  Your-Supplier prefers to resolve this informally without going into the legal arena.  Does that work for you?” 

 

Notice of Breach.  Your attorney should follow up the 90-day phone call with a letter.  If the applicable contract has a formal notice of breach provision, and notice was not given previously, it’s time to provide formal notice. 

 

What to Do at 100 Days.  If there is no resolution by 100-110 days, it is often helpful to send the debtor a final demand letter with a draft summons and complaint.  This lets the debtor know that the creditor is serious.  At this stage you should give the debtor another 10-15 days to respond.

 

120-Days—Lawsuit.  If nothing else has worked, it’s time to file a lawsuit.  Remember, by this point, you have tried (at least) the following:  four company attempts to collect the debt including a C-level attempt; a telephone call from the attorney; a letter from the attorney; notice of breach and a final demand letter with a draft summons/complaint.  There is nothing else you can reasonably do but file in Superior Court. 

 

Conclusion.  Timely collection of accounts receivable is crucial to business success.  However, if informal methods fail, your company should not hesitate to file legal action.

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Nathan Wirtschafter, Esq. is a California business trial attorney.  His law practice encompasses a broad range of business matters, including business litigation and business collection.  The firm represents clients in state and federal courts, arbitration and mediation.  He can be reached at (818) 660-2518 and ndw@ndwlaw.com.

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