Accounts Receivable / Collections

Part of being an effective leader of your small business is to be able to make sense of the numbers and to know that cash is king!  Understanding accounts receivables and collections is important because your business must be able to understand how to properly manage accounts receivables and collections in order for your business to expand and grow.

Managing Accounts Receivable and Cash Flow is one of the most valuable things that you can get good at as an entrepreneur which can help to ensure the long-term success and growth of your business.  Improperly managed accounts receivable is one of the most common causes of cash flow shortages and this can have negative impacts in all aspects of your small business.

Here are some ways to manage accounts receivable to improve cash flow:

  • Go Electronic – Sending invoices electronically, rather than through the mail, can help to reduce turnaround time. Many good bookkeeping software programs allow you to manage your invoices electronically and also to put “pay now” links on the invoices.  Adding “pay now” links to your emails can make the payment process even easier.  Better yet, get authorization from a client to automatically bill them and this will get your money in the bank instantly.
    • We recommend using a software such as Quickbooks Online which allows you to manage your invoices conveniently within your bookkeeping program.
  • Reduce Payment Terms – Combined with going electronic, a business can improve its cashflow by requiring invoices to be paid upon receipt rather than on net 30 day terms. This strategy can be easily incorporated into Going Electronic in order to combine both the benefits of a reduced term and an easier ability to collect your funds.
  • Maintain a Great Client Relationship – Keeping your clients happy is a simple thing that can help improve invoice payment times. It is no surprise that people are more likely to make good on a promise if they feel emotionally attached to the relationship.  This may arguably be one of the most valuable methods to ensuring that your collections rate is as low as possible.  As an example, if you have a vendor who does find himself in financial trouble at some point, having a great relationship with them will help to ensure that when the vendor does have extra funds, you become more of a priority than the other creditors.  A little kindness can go a long way when cash flow shrinks with your vendors!
  • Offer multiple payment methods – There are many ways to get your money from a vendor which can accelerate the payment time and also make the billing cycle more convenient for your client. Other than cash and check, some examples are merchant services, PayPay, electronic check, ACH and Automatic Bill Pay.  It is important for companies to be flexible enough to provide enough solutions to accommodate the marketplace.  Some vendors may actually prefer to use automated payment methods discussed in the Go Electronic section which can reduce your need for following up on your invoices.
  • Set Clear Credit Policies – taking reasonable care to review a client’s credit is a simple way to help reduce the possibility of opening high-risk accounts. Set up clear policies for extending credit or deferring client payments.  If your company does not have a policy in place to help qualify clients who you extend credit to, it would be a good idea to put some sort of a policy in place
  • Contact the Client – as simple as this sounds, contacting the client if the payment is due can help to get the invoice paid. You should exhaust all reasonable communication efforts before sending an invoice to collections.  Not only can contacting the client help to improve the collections relationship, but it can also improve your chance of getting referrals which can improve your cash flow.
  • Properly Utilizing A/R Reports – many bookkeeping software programs allow you to analyze you’re A/R through the effective use of reports. Here are some reports that can help you:
    • Open Invoices – Lists unpaid invoices and statement charges, grouped and subtotaled by customer.
    • Customer Balance Summary – Shows each customer’s total open balances.
    • A/R Aging Detail – Lists all unpaid invoices, grouped by number of days past due. Includes due dates, customer names, amounts, and totals for each billing period.
    • Invoice List – Shows a chronological list of all your invoices for a selected date range.
    • A/R Aging Summary – Shows unpaid invoices for the current period and for the last 30, 60 and 90+ days so you can see how long they’ve been open (outstanding).
    • Collections Report – Shows overdue invoices grouped by customer. Includes the due date, days past due, and total for each customer.
    • Statement List – Lists statements you sent to customers during a selected time period, including the statement date.
    • Customer Balance Detail – Lists unpaid invoices for each customer, including invoice date and number, due date, total, and amount owed to you (open balance).

As an entrepreneur, if the workload of maintaining client invoices is overwhelming, then hiring an outside firm to help you manage this task can be a viable solution.  Most businesses are very good at performing their core competency; however, the back-office work may not be such a strong point.  Hiring an expert like us to help you to improve your accounts receivable procedures can not only make your invoicing and billing more efficient, but it can also improve your cash flow and collections times.