Improve Your Accounts Receivable Management
There are lots of things that go into making sure your business is successful. Of course, generating sales is very important, as well as hiring employees, managing them well, and making sure that things run smoothly.
However, there’s one component of a successful business that people often overlook: accounts receivable. While it’s true that sales are great, companies typically fail due to poor cash flow- not so much a lack of sales/revenue. One business owner puts it like this: “A sale is a gift to the consumer until the money hits the bank.”
Sadly, many small businesses end up coming out on the short end of the stick when it comes to accounts receivable- especially when they’re doing business with a large company. For example, many big-box retailers stretch out vendor payments and suppliers to 90, or even 120, days. This means that many of the smaller businesses’ cash flow cycles are squeezed tighter and tighter.
Of course, the big businesses are not the only ones that pay their bills slowly. In order to increase their own cash flow in this sluggish economy, many companies are now paying their bills late. For example, if the terms are net-30 days, they are not making a payment until day 45 or after. If a payment is set to be due in 45 days, they may end up trying to stretch that out until day 60 or later.
If you are a small business owner, you may feel a bit helpless when it comes to getting customers to make their payments on time. However, this is the worst attitude you can have. Instead, try taking a more proactive approach by making collecting accounts receivable a top priority- not just in your accounting department, but across your whole company. Gather reps from several departments including financial, accounting, management, sales, and other pertinent departments to create a comprehensive strategy to increase your accounts receivable collections.
5 Tips to Improve Collection of Accounts Receivable
Consider implementing the following tips to improve collection of accounts receivable in your business.
Create an Accounts Receivable Aging Report
The very first step you must take in an effort to improve accounts receivable collections is to determine the payment status of all of your accounts. You can do this by creating an accounts receivable (A/R) aging report. This report will track and measure the status of all of your customers.
Accounts are sorted out by the number of days since the issue of the invoice. For example, 0-30 days, 31-60 days, and so on- and will list the amount they owe. This way, you can easily see potential collection problems before the accounts become seriously past due and you can more efficiently focus your collection efforts.
Be Proactive in Invoicing & Collections
When you are preparing and sending invoices, there are typically some things you can do to make it easier for your clients to pay. For example, make sure that invoices are clear and complete and are not missing any info that could result in your client’s accounting department to kick it out for further review.
You should also take the time to learn the nuances of your client’s payment procedures for their invoices and carefully follow them. A few days before the invoice is due, have someone in your office reach out to your client to be sure they have all they need to make the payment, especially if it’s a large invoice.
Move Fast on Past Due Invoices
Studies have revealed that the longer a receivable goes uncollected, the less likely you will ever be able to collect payment- in full or even partially. So, day 45 is not when you need to contact a client who owed you a payment on day 30. Instead, you should be having someone from your company contacting the client the first day payment is late.
You should begin with a gentle reminder that payment is past due. This is usually all you need to do in order to receive payment. If payment does not come within a reasonable amount of time, you may need to be a little firmer with your reminders- including sending letters that legal action will be taken if the payment is not received within a certain amount of time.
Offer Early Payment Discounts
Consider offering a 2/10, net/30 discount in which your customer will get a 2 percent discount if the payment is received within 10 days instead of waiting until 30 days. While it’s true that a discount will end up costing your business a little bit, it may actually be worth it because of the boost it provides to your cash flow.
Offer a Payment Plan
If you have some past-due clients, consider offering them a payment plan. This will help you understand if your clients are having cash flow problems of their own and give them the chance to ask for some help. If this is the case, offer them a payment plan for the amount that is past due. If you do this, make sure that you put the plan and terms in writing and have both parties sign it. Then, make sure that all future orders are COD (cash on delivery) until the past due amount is paid off.
Talk to Your Bank
Discuss some cash management tools with your bank that may be helpful. There are lots of cash management services that can help improve your collections and increase your cash flow cycle. One of these is known as a wholesale lockbox in which your clients will mail checks to a special PO Box that is monitored by the bank that collects the payments and deposits them immediately. Another option is ACH, or automated clearing house, which takes electronic payments and eliminates the “check is in the mail” process completely.
Though it is often overlooked when managing a business, accounts receivable management is actually a very critical part of the process. You must ensure that you are being paid on time so that you can be sure that your business continues to run smoothly.