By Avi Grunwald.

An overdue invoice pops up in your inbox, and the inevitable query arises: “Is it time to send this to collections?” After your client has invested time and energy reaching out, it’s only natural to feel a degree of frustration. Yet before proceeding, it’s critical to assess whether someone who isn’t privy to the situation can comprehend the invoice’s context and the outstanding balance.

This straightforward test is pivotal for accountants who guide small businesses through challenging financial waters. For a collection agency to effectively address the matter, a comprehensive grasp of the situation and clarity around the claim are essential. Simply providing a name attached to an unpaid balance won’t suffice.

Here are five essential checks designed to prepare your client’s account for potential referral to collections while maintaining accurate records along the way.

1. Verify the Debtor’s Identity and Agreement

Kick things off by confirming the official name of the debtor and cross-referencing it with contracts, credit applications, purchase orders, and invoices. Variations like trading names or alternative billing addresses can muddy the waters regarding who is legally responsible for the account.

Next, locate the agreed-upon payment terms. Did the client approve a written proposal, or was it a handshake deal communicated over the phone? If terms have changed verbally, always seek documented confirmation to avoid ambiguity later.

Highlighting discrepancies is better than silently fixing them. This approach ensures that any future party reviewing the account is fully briefed on the transaction's network—especially anything requiring additional clarification.

2. Compile Supporting Documents for the Invoice

An invoice itself is merely a statement of charges; supporting documents are pivotal to substantiate the products or services provided. Depending on the transaction, required files could range from delivery confirmations and service logs to well-documented communications that verify completion.

Encourage your client to systematize these documents around each unpaid invoice. A chaotic collection of emails can complicate what should be simple queries like, “Which document corroborates this charge?”

It's also essential to record any alterations that impact the amount owed. An initial proposal may not tell the entire story if changes were agreed upon later. Keeping a chronological log of adjustments leads to clearer understanding and fewer surprises down the line.

3. Adjust the Outstanding Balance for Accuracy

Don’t take for granted that the figure on an outdated aging report reflects the current outstanding amount. Always review for recent payments, credit notes, and any unapplied amounts prior to handing over the account.

For instance, if a customer originally owed $12,000 but has sent $2,000 and was granted a $500 credit, its remaining balance should be recalculated to $9,500. If the $2,000 remains in unapplied cash and the credit is an email-only confirmation, the outstanding invoice might still read $12,000.

A dated reconciliation document should clarify how the remaining balance was reached by breaking down original charges and adjustments based on valid terms. Any unaccounted differences need to be straightened out before proceeding.

4. Document Disputes and Recent Communications

Merely stating, “The customer won’t pay” glosses over the complexities at play. It’s vital to capture what the customer actually expressed. Was the invoice lost? Did they take issue with part of the work? Or did they acknowledge the bill but request more time?

Each scenario necessitates a different follow-up strategy. Ensure that all relevant communication is kept on file, alongside information on contentious invoices or charges. If your client has already communicated regarding the payment, record that, too, along with any supporting documentation.

Be meticulous with arrangements: document the promised payment amount, due date, and whether anything was received. Avoid interpreting tentative statements—like “We’ll likely pay next week”—as solid commitments. The collection agency should also be made aware of any active arrangements to represent the most accurate situation.

5. Establish Reporting Protocols After Referral

Passing the account to collections doesn’t signify the end of the process. Customers may still reach out to your client directly, and some may opt to settle their debts without informing the agency. Defining a clear process for updating the agency on such developments is essential.

Appoint a primary contact for communications, as well as a backup. Clarify how payment updates, credits, disputes, and changes in agreements will be reported and acknowledged. Each payment notification should detail the account number, payment amount, receipt date, and how it pertains to invoices.

Maintain a record of these updates to ensure that both your client and the agency reflect the same balance. Simply entering a payment in your internal system doesn’t inform the agency that an amount has shifted.

To streamline this process, a concise referral cover sheet can be invaluable: customer information, outstanding balance, reconciliation date, supporting documents, unresolved inquiries, last contact details, and the person responsible for future updates. If a field cannot be filled in, your client will have clear insight into what matters require attention, allowing whoever takes on the account next to focus on settling the outstanding balance instead of scrambling to make sense of it all.

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Avi Grunwald is the founder and CEO of Fair Capital, a New York-based debt collection agency dedicated to managing commercial receivables and other collection challenges for business clients.