Unlocking Cash Flow: Strategies for Managing Your Accounts Receivable

Many business owners are excited when they make a big sale. While booking the revenue and moving inventory is an accomplishment, many customers take too long to pay their invoices. Delayed payment of your accounts receivable can impact your cash flow and ability to stay current on your own bills. Savvy entrepreneurs know that they can encourage customers to send money more quickly by accepting multiple payment options, offering discounts on timely payments, and using other strategies. Learn more about how to manage your accounts receivable to ensure your business doesn't incur a cash crunch.

6 Ways to Manage Your Accounts Receivable

While many businesses get paid immediately upon making a sale, others get paid on terms negotiated with their customers. Offering terms to customers encourages them to buy now, but if they take too long, you may not be able to pay your bills. Here are six ways to master your accounts receivable management to get paid faster.

Incentivize Early Payments and Penalize Late Payers

Using a carrot-and-stick approach can help you manage your accounts receivables and encourage on-time customer payments. A common tactic to get paid faster is to give customers a small discount if they pay quickly.

If a customer is constantly paying late, it may make sense to charge late fees, interest, or finance charges. The sad truth is that many customers need an incentive not to pay bills late. It’s common for many small businesses to tack on additional fees when an account is 15 or 30 days past due. Getting charged extra is often all it takes to get a response from a late-paying customer.

Before offering discounts or adding penalties, consider how they may affect your bottom line. Too big of a discount can erode profit margins. At the same time, penalties may cause customers to take their business to a competitor.

Due Diligence on Prospective Customers

Perform due diligence on all potential customers before you agree to offer them terms. Review their credit report, perform a background search, and contact references to see how they manage payments. Red flags can help you avoid doing business with people with a history of not paying on time.

As a business owner, you are granting customers credit when you offer goods and services before getting paid. Traditional lenders check FICO credit scores and payment histories to manage risk, and it only makes sense for you to do the same. Obtaining credit reports on prospective clients may cost money upfront, but this small cost could be worth it to avoid taking a loss on bad billpayers.

Require a Customer Deposit

Requiring customers to pay for a portion of their purchase upfront can help businesses stay current with their bills. The deposit amount varies by industry, but many companies require a 50% deposit. If the customer takes a long time to pay their bill or never pays, the impact on your bottom line is less than if you never collected the upfront payment.

Depending on your industry and the size of the project, you may request progress payments as you reach certain milestones. These milestones can be based on time, the percentage of work done, or project stages.

Be aware that having the same policy for all clients is essential. It could harm your reputation if you have different policies for different people.

Report Late-Paying Customers to Credit Bureaus

Individuals and businesses care about their credit scores because they significantly impact their ability to qualify for loans, lines of credit, credit cards, and even jobs. Reporting customers’ payment history to credit bureaus like Dun & Bradstreet, Experian, and Equifax motivates them to pay their bills on time.

When a customer agrees to payment terms, clearly explain your company policy about reporting customer payment history to the credit bureaus. If a customer is consistently late in making payments, reporting them will impact their credit rating. Avoiding negative credit marks is a powerful incentive to encourage customers to pay on time, preventing your accounts receivable from getting out of control.

Take Away Customers’ Ability to Pay With Credit

Business owners can reduce accounts receivable and encourage timely payments by limiting how much customers can buy on credit. You'll increase cash flow and limit your risk by requiring customers to pay for goods and services when delivered.

Making this switch may lead to a loss in sales because some customers need credit terms in order to sell products to their customers. They sell the goods and repay you with the money they've received from their revenues. Having an open line of communication with your customers and understanding their business will help you understand if this is a smart choice for your business.

Accept Credit Cards as Payment

Instead of waiting for customers to pay their invoices, you can get paid much faster by accepting credit cards as a payment option. When you make a sale, you'll typically get paid within one to three business days from the bank. The customer then pays their credit card balance when the statement closes or as their cash flow allows.

Accepting credit cards enables you to transfer the payment risk from your business to the bank. Businesses typically pay a monthly charge to rent equipment and fees of about 2% to 3% of each transaction. In exchange, you'll receive money more quickly, maintain lower accounts receivable balances, and encourage customers to buy today versus waiting until they have more money.

If you need a lump sum of cash, you can borrow against future credit card receipts. As you collect customer payments, your credit card receipts are used to pay off the loan.

Use Capital to Cover the Cash Flow Gap

What can you do to improve your business cash flow if you can’t get customers to pay faster? Here are some accounts receivable strategies to consider.

Leverage a Business Credit Card

Business credit cards can help owners gain some level of control over their expenses. They provide a buffer when accounts receivables increase. Although interest rates on credit cards can be high, you can limit interest by paying balances off quickly. By maximizing the card's grace period, you can receive the equivalent of 30 days of interest-free financing.

Business credit cards typically come with higher limits than personal cards. Borrowing limits are based on the owner’s personal credit score and income and the company’s revenue.  Some business credit cards earn rewards and include other valuable benefits, like cell phone insurance, free checked bags, airport lounge access, or hotel elite status, that can save you money.

Secure a Business Line of Credit

Many business owners depend on a revolving line of credit through a business credit line to get through periods of poor cash flow. Similar to a credit card, the line of credit limit is based on the financial standing of the business and the owner’s credit history. A business credit line comes with a maximize credit limit you can borrow against as needed. You'll only pay interest on the amount you borrow, and your available credit increases as you pay down your balance.

Factor Outstanding Invoices

Another fast source of cash is accounts receivable factoring, often referred to as invoice factoring or receivables finance. You sell your outstanding accounts receivable to a factoring company, and it pays you a percentage of the total value of those invoices. You'll typically receive between 70% and 90% of the value, depending on the quality of your customers.

As customers pay their invoices, you'll receive the balance minus a factoring fee of between 1% and 5% of the value of your invoices. Previously, invoice factoring was only available to larger companies, but some factoring businesses now offer the service to smaller ones.

Lenders may also offer accounts receivable loans, which use the value of the invoices as security for the loan. In this case, you’re not selling the invoices to a third party. They’re simply acting as the collateral on a loan.

Credit Insurance

If you're offering terms to customers, consider getting credit insurance. This insurance policy reimburses companies for invoices they’re unable to collect. It allows you to collect the invoices faster and prevent the risk of never receiving the money owed.

While you'll usually pay about one-half percent of the amount covered, it can be worth it if you're concerned about customers not paying.

Align Your Accounts Payable With Accounts Receivable

Forecasting accounts receivable to determine when payments will arrive can help you stay on top of payments to your vendors. If your issue is that your accounts payable terms are shorter than your accounts receivable terms, take steps to align the two better. Ask your suppliers to provide longer repayment terms to avoid a cash flow crunch. By paying your bills on time, vendors may be more willing to extend longer repayment terms.

Invoice Promptly

Business owners can inadvertently cause their cash flow issues by not invoicing customers promptly. When you're slow to send invoices, it takes that much longer for customers to pay. They can't pay invoices they don't have.

Never let poor billing practices create an accounts receivable issue for your business.

If you regularly fall behind in invoicing customers, outsource the task to a bookkeeper or an accountant. While they will charge an hourly rate for handling this task, it could be a worthwhile investment to speed up the payment process and improve cash flow. Also consider automation for your billing and accounts receivable process with an accounting software solution like QuickBooks. Streamlining the accounts receivables management process reduces the amount of time you need to spend and ensures your invoices are sent promptly.

How to Manage Late-Paying Accounts

When a customer constantly pays late, or their behavior worsens, stay courteous and discuss it with them. Request to meet in person, over the phone, or via Zoom call to discuss the situation. During the meeting, ask them if they can pay with a credit or debit card, ACH, or other online payment option to process the payment immediately.

If the customer is 60 or 90 days behind, tell them you are trying to clear up your accounts receivable and ask when to expect payment. Show empathy and offer solutions that get you paid without losing the customer.

Be diligent and follow up. If the customer agrees to a payment date and misses it, contact them immediately to remind them of the missed payment. Include a copy of the invoice and stamp it past due.

Invoices that are more than 90 days past the due date are considered bad debt. You must become more assertive to get paid. Document your steps, and send a final demand letter. If they still do not pay, step up the collections process by hiring an attorney to file a lawsuit or sending the bill to a collection agency.

The Bottom Line on Speeding Up Your Accounts Receivable

Small business owners cannot simply hope their customers will pay sooner or gently push them to make payments on past-due invoices. You can minimize late payments and increase your cash flow by taking control of your accounts receivable and managing customer relationships.

Begin by doing due diligence on prospective clients. Incentivize customers to pay early and add penalties if they pay late. Ensure customers know their payment history with your business, which will be reported to the credit bureaus and can affect their personal and business credit scores. Consider reducing credit limits or revoking credit terms altogether if the customer cannot pay on time.

If your customers are paying late, and you're squeezed for cash, you have options to ensure your bills don't fall behind. A business credit card, line of credit, or accounts receivable factoring can help you through challenging times.

Frequently Asked Questions (FAQs)

What is accounts receivable?

This term is used to describe money owed to a business by customers. The customers take goods and services immediately, with a promise to pay in the future. Accounts receivable is listed as an asset on your balance sheet.

What is accounts receivable vs payable?

Accounts receivable and accounts payable are two financial terms business owners should be familiar with. When a customer owes you money for goods and services you've performed, that is an account receivable. On the other hand, when you buy goods and services from a supplier on terms to be paid later, that is an account payable.

Is accounts receivable a debit or credit?

When you sell products and services on terms to a customer, you'll debit your balance sheet to increase your total accounts receivable. As you receive customer payments on outstanding invoices, you'll credit accounts receivable to reduce that asset and debit your bank account to notate the payment.

What is the purpose of accounts receivable?

The strategy of offering terms is to increase sales and boost inventory turnover when customers do not yet have the money to pay you. While customers can get a bank loan, they may not be able to get approved. Accounts receivable is a short-term loan between the seller and its customers that doesn't involve traditional underwriting or a third-party lender.

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