An account correspondence refers to bookkeeping records that stem from the double-entry system of economic operations. The need for such a correspondence arises to ensure uniform reflection of all the account operations. By following all the instructions for using the appropriate plan for the compilation of bookkeeping records, a standardized accounts correspondence is established. There are many ways to record correspondence of accounts such as documents, account registers or other bearers of accounting information. When a correspondence of accounts is initially entered in primary documents, it is termed as an entry. Accounts correspondence can have many forms like an invoice, statement of accounts, delivery challans and many other financial transactions. To understand the nitty-gritty of correspondence of accounts, one will have to define a collection letter, which we will read in detail in this article.
What is Collection Letter
For managing accounts receivable, bank personnel needs to communicate with their customers. A collection letter plays an important role in this communication strategy. To define a collection letter in simple terms, it is a written notification sent to a bank customer stating details of his past due payments. The first collection letter to the client is sent as soon as an invoice has gone past the due date. The tone of the collection letter changes as invoice keeps going unpaid. A payment collection letter that was sent for an invoice gone unpaid for 15 days would have a different choice of words than a letter that is sent after the payment is 90 days overdue. Collection letters become more persistent with time.
The Importance of a Collection Letter
A collection letter is like a nudge to the customer to send payment or to call them and discuss the matter. A collection letter, also known as a dunning letter, must be polite yet firm and have clear instructions on how the customer can make the overdue payments. A collection letter is an important component of any business. It is an effective way to influence a debtor to pay his or her dues and also maintain goodwill with the customer. The credit facilities that exist in the business world have given rise to collection letters and their importance cannot be overlooked.
Credit is defined as purchasing and receiving goods and products without the need for immediate payment. The credit facilities to the buyer have helped businesses to expand hence the tradition of credit facilities has flourished. However, at the time of settlement, if the buyer does not respond, the seller needs to take the help of dunning letters. As long as credit facilities remain in the business system, collection letters would hold importance. A credit collection letter must be discreet and should not be threatening or demanding.
General Characteristics of a Collection Note
A collection letter must include:
the name of the original creditor and his company
the debt collecting agency that represents the lender (if there is one)
the full debt amount
additional costs and fees (if any)
If the collection note is a final one (demand) or is a letter before action, it would also have the last deadline for payment. After this deadline payment is crossed, a case will be filed in court and the small claims court procedures will proceed.
A payment collection letter or debt recovery letter is usually dispatched by either the creditor or the DRA (Debt Recovery Agency). A collection note can also be sent by a debt buyer who buys default profiles from the lender who then becomes the official owner of these delinquent accounts. A debt recovery solicitor can also send a debt collection letter.
A Collection Letter Should Be:
Firm but not demanding
Persuasive but not forceful
Tactful but not sarcastic
You-oriented
Polite and considerate
Should show concern for customer’s best interests
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Collection Letter Format
It must be considered that as an initial communication, one does not send a collection letter to contact the customer. In the preliminary phase, one would either send an email or call up the customer to let them know that an invoice due date is approaching. As soon as the payment goes overdue, the first collection letter must be sent in the following format:
Days past due
The amount that is due
Mention previous attempts to collect the amount
A summary of the customer’s account
Instructions on what customer needs to do next
The actual due date for payment. One must not use vague terms like “In the next 10 days” but mention the exact date when the amount was due
Your contact details
FAQs on Accounts Correspondence: Best Practices
1. What is accounts correspondence in a business context?
Accounts correspondence refers to all formal written communication between a business and its customers, suppliers, or financial institutions regarding financial matters. This includes the exchange of information related to invoices, payments, credit terms, account statements, and debt settlement. Its primary purpose is to maintain clear, accurate financial records and ensure smooth transactions.
2. What are the most common examples of accounts correspondence?
The most common examples of accounts correspondence include:
- Invoices and Bills: Formal requests for payment for goods or services provided.
- Account Statements: A summary of all transactions within a specific period.
- Collection Letters: Letters sent to customers to collect overdue payments.
- Credit and Debit Notes: Documents used to adjust the amount a customer owes.
- Remittance Advice: A notification sent by a customer to inform the supplier that their invoice has been paid.
3. Why is maintaining professional accounts correspondence so important for a business?
Maintaining professional accounts correspondence is crucial for several reasons. Firstly, it helps in maintaining good relationships with customers and suppliers by ensuring clarity and preventing misunderstandings. Secondly, it plays a vital role in effective cash flow management by prompting timely payments. Finally, it serves as a legal record of all financial communication, which can be critical in case of disputes or audits.
4. What is a collection letter and what essential information must it contain?
A collection letter, also known as a dunning letter, is a written notification sent to a customer regarding a past-due payment. It acts as a formal reminder to settle their outstanding debt. An effective collection letter must include:
- The exact amount due.
- The original invoice number and date.
- The number of days the payment is overdue.
- Clear instructions on how to make the payment.
- A specific deadline for the payment.
- Contact details for the accounting department to address any queries or disputes.
5. How should the tone of a collection letter change as an account becomes more overdue?
The tone of a collection letter should escalate strategically. Initially, for a payment that is a few days overdue, the tone should be a friendly reminder, assuming an oversight. As time passes (e.g., 30-60 days past due), the tone becomes more firm and persuasive, highlighting the urgency. If the payment is severely overdue (e.g., 90+ days), the letter becomes a formal demand, clearly stating the consequences of non-payment, such as involving a collection agency or taking legal action.
6. What is the key difference between a reminder, an inquiry, and a demand letter in accounts correspondence?
The key difference lies in their purpose and tone. A reminder is a gentle, polite nudge about an upcoming or recently missed due date. An inquiry is more direct, asking about the status of a payment and if there are any issues preventing it. A demand letter is the final, most formal stage; it is an assertive and official notice requiring immediate payment and often outlines the legal or financial consequences of further delay.
7. How does effective accounts correspondence contribute to managing accounts receivable?
Effective accounts correspondence is fundamental to managing accounts receivable. By sending timely and clear invoices, regular statements, and systematic collection letters, a company can significantly reduce the average collection period. This practice helps in minimising the risk of bad debts, improving the company's cash flow, and maintaining a healthy financial position without damaging customer relationships.
8. What are some best practices for writing effective accounts correspondence?
To ensure accounts correspondence is effective, one should follow these best practices:
- Be Clear and Concise: State the purpose of the communication directly and avoid jargon.
- Maintain Professionalism: Always use a polite and respectful tone, even in collection letters.
- Ensure Accuracy: Double-check all figures, dates, and account details before sending.
- Be Prompt: Send correspondence in a timely manner, especially invoices and reminders.
- Provide Solutions: Offer clear instructions and options for payment or for contacting the company to resolve issues.
