May 20, 2021 | Last Updated on: July 20, 2023
Simply put, it is money owed to a business by its creditors (most often its creditors are its customers). Accounts receivable is an asset account typically under “current assets” on a company’s balance sheet and is increased with a debit.
It is essential to have a rigorous accounts receivable management process in order to protect your business’s cash flow and improve liquidity. Collecting regular and timely payments from customers sooner and more consistently doesn’t just boost the balance in your bank account – it helps strengthen your business’ cash flow, enabling you to have more working capital on hand to invest in your business.
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Challenges collecting balances could stem from insufficient attention to late payments, failure to follow up, incorrectly applying payments to the wrong accounts or invoices, and poorly trained staff. It could also stem from a power dynamic between a business and its customers – perhaps the business owner is afraid that pushing a customer too hard could result in the loss of that customer. Business owners who have trouble managing their accounts receivable may have customer balances that linger for a long time or are never paid.
Billing customers starts with an invoice and your invoicing process should be rigorous. Issue invoices quickly, showing your customer that you are organized and quick to collect and implying that you expect the same. Different invoicing software can send customers automated reminders, which can take some of the manual tracking and messaging off of your plate. Jeremy Aspen, the founder, and CFO of Aquenim, a company in Omaha that provides back-office services for real estate professionals, described his approach to invoicing: “Invoice regularly, as immediately as possible. Having the discipline to do it on a very regular basis helps control cash flow.”
If your business charges customers on a recurring basis, one step you can take is to set up an autopay mechanism such as charging their credit card on a specified interval. Zach Reece, COO of Colony Roofers, a reputed roofing business based out of Atlanta, GA, recommends that all recurring services be set up on autopay. “As a rule of thumb, recurring services should have an autopay set up, while one-off services can be paid in increments, with a security deposit if necessary depending on the type of service.”
Make sure your credit terms are clear and managed carefully – have a process for determining who you are extending credit to. And make sure it’s worth it for your business. Are you extending credit as a way to attract customers you wouldn’t otherwise be able to service? Or would these customers be able to pay upfront anyway? Remember that customers typically have other ways to get financing (e.g. lines of credit, business credit cards) that would enable you to get paid upfront and don’t require you to take on as much risk. If you do allow customers to use credit, consider getting a personal guarantee in order to make the business owner personally liable for the debt.
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Offer customers flexibility in how they pay in order to encourage them to pay. Different payment mechanisms are certainly preferable to others but getting paid is always better than not getting paid or getting paid late. Advertise the methods of payment that you accept, front and center, so that customers have less of an excuse to delay. Furthermore, you might encourage fast payment by offering a discount or incentive for early payment. Nathan Liao, Founder of CMA Exam Academy, has had luck with the “carrot” approach. He explains, “To help speed up payment on outstanding A/R, offering an ‘early payment’ discount can oftentimes be enough to entice customers to pay early and keep your A/R balances low and from aging too long.”
Your accounts receivable process can’t work unless you can track what you are owed! Be sure to apply customer payments to the right accounts with details like due date, payment terms, amount of money, time, and method so that you can track payments accurately. For example, you can allocate payments to a specific invoice instead of a customer account which helps you determine which invoices you need to follow up on. It’s very important to have good hygiene with customer data and it is a best practice to use some kind of accounting software or accounting system, even something simple like Excel or Quickbooks, to help keep track of your accounts. The data should be regularly audited and there should be procedures in place that prevent the data from being overwritten, juxtaposed, or lost.
Related Article | What is Accrual Accounting?
If customers are behind, develop a process to swiftly resolve the delay. Be strategic about which accounts you devote your attention to first – think about which metrics matter the most (e.g. largest balance owed, largest number of days past due). Determine if you will contact the customers and how you will do it – in writing, by phone, by email? Consider the use of strategic discounting to collect (e.g. if you pay the total amount owed within this timeframe, I can offer a 5% discount on a future order), and negotiate payment plans if needed. Charles Leduc, the COO of Mold Busters, has found that a personal call can help dramatically with accounts receivable: “The best method to collect on accounts receivable is to call. Paper invoices and email reminders are easy to ignore. Another human being is not.” And if you aren’t able to collect, determine if it would be worthwhile to seek the help of a debt collection agency or write off the debt.
If your business offers credit to customers, having a tried-and-true method for collecting your accounts billable/accounts receivable in incredibly important. One of the main challenges many small businesses face is maintaining and strong cash flow. To keep your cash flow in line with your revenues, it is important to make sure that you are collecting your accounts billable on a consistent and regular basis.
As always, at Biz2Credit, our number one priority is helping small businesses across the nation. As part of this, we work hard each and every day to keep our readers up to date with the latest methods, developments, and news relevant to America’s small businesses. So, be sure to keep checking back here at our Biz2Credit Blog for timely and relevant information that pertains to small businesses across the nation.
