What is the effect of late fees on accounts receivable collections?

Late fees can indeed encourage timely payments in accounts receivable collections as they create a financial incentive for customers to settle their invoices by the due date. When customers are aware that a late fee will be assessed if they fail to make payment on time, they may prioritize these payments to avoid incurring additional charges. This behavior can help improve cash flow and reduce outstanding receivables.

However, it is important to balance the enforcement of late fees with customer satisfaction. If customers perceive late fees as excessive or unjust, it could lead to frustration or a negative impression of the business, potentially impacting customer relationships or loyalty. Thus, while late fees can motivate timely payment, they must be applied judiciously to maintain positive customer interactions.