Running out of cash in your business is like getting smacked in the face with an airbag. The cushion of money you depend on to run your daily operations smoothly no longer exists. For most business owners, customers don’t pay them upfront. In other words, their accounts receivable can pile up during days or even months. Is that your case too?
Without money in hand, you won’t be able to purchase materials for new jobs or, even worse, you may be unable to meet payroll obligations. To prevent that from happening, you can implement a payment process so cash flow doesn’t suffer. Learn here how to improve your cash flow by setting up a foolproof system to manage your accounts receivable.
What Are Accounts Receivable and How Does Your Debt Collection System Affect Your Cash Flow?
Customers receive services and goods from your business in exchange for payment. If they don’t pay you immediately, customers incur the debt and you should list what they owe under accounts receivable on your balance sheet and as revenue on your income statement.
This is a common practice in some industries. For example, in the digital advertising industry, 62% of invoices to take 60 days or more to be paid. Building contractors, architects, and engineers in the construction industry can wait for up to 80 days to get paid for their work. And the largest retailers don’t pay their vendors for as long as 90-120 days.
An example of accounts receivable would be a restaurant supplier that bills the restaurant after delivering the products. In this case, the supplier would have an account receivable. Or let’s say you are a contractor. An example of accounts receivable would be when you bill your client once you have completed the construction project. In any case, the business generating the bill records an account receivable for unpaid invoices as it waits for its customers to pay their bills.
To reduce the impact of this period of time and manage your accounts receivable better, it’s imperative that you optimize cash flow so working capital is always available. Once you set up a debt collection system, you’ll be in a better position to control your finances. Check out these ways to keep your cash flow stable.
15 Tips to Manage Accounts Receivable
1. Check credit on potential clients
If you intend to do business on a long-term basis for expensive projects, check a client’s credit history to verify creditworthiness. Remember you aren’t a bank. You extend credit as a privilege as part of your customer service plan.
2. Establish how long you can wait to get paid
Here’s an example. If your accounts payable vendors expect payment in 30 days, then you shouldn’t give your customers 45 days to pay their bills. By giving customers 15 days to pay invoices, your cash flow should not suffer. How to decide the payment terms for your business? Get the clues here.
3. Stick to your credit policy
You shouldn’t offer every client credit if they aren’t creditworthy. Neither should you offer credit to first-time clients until you’ve established an ongoing relationship with them. Once you extend credit, don’t be wishy-washy with clients when they don’t pay.
4. List payment terms
On your service agreement or purchase order, you should clearly state when the payment is due rather than use the term “upon receipt”. That terminology creates a gray area for customers so they set a payment date, not you. Here you can get a complete dictionary with the most common terms used in invoices, so you can make yours clear and precise.
5. Offer payment plans
Before customers commit to buying your product or service, ask them how they would prefer to pay. Some may want to make installment payments or pay by check, cash, money order, or use credit/debit cards. You may want to receive a portion of cash upfront by requiring a 15% deposit on orders.
6. Track payments
Designate a staff member to call customers to double check they received a bill and remind them when it’s due. If they fail to pay on time, make a second call and ask them why the bill hasn’t been paid and when you should expect payment. Keep thorough notes in each customer file.
7. Add late payment fees
Don’t hesitate to nudge your customer to pay on time by adding a late payment fee such as 1.5% interest or more on unpaid balances. As a courtesy, write off late fees the first time customers don’t pay on time. However, make it clear you won’t write off late fees in the future if they continue to pay late.
8. Bill regularly
People live busy lives and need reminders to pay their bills. Send out invoices twice a month instead of once. By doing so, you should see an uptick in payments.
9. Give discounts
When clients pay on time, reward them by offering a 1-2% discount on their next purchase. You can increase the discount percentage on their next order when they pay upfront or, for example, within five days.
10. Invest in a cloud-based invoice system
To save time, an automated online accounting system sends you reminders when customers are overdue on bills and simultaneously sends them an electronic alert. Likewise, the system can send recurring invoices automatically. You can also communicate with clients to make deals and negotiate terms and pricing.
11. Ask for upfront payments
Rather than create an account receivable for a client, it’s to your advantage to be paid immediately once you deliver a product or service. In order to pay your debts (remain solvent), your assets must exceed liabilities. You stay on solid financial footing when you have working capital to spend.
12. Don’t extend credit to overdue clients
You’ll be asking for financial trouble if you continue to give credit to slow-paying customers. When clients don’t pay on time, you’re better off not doing business with them or putting their accounts on hold.
13. Set up billing dispute criteria
Your staff needs to know how to handle customer billing disputes should they arise. Disputes may be unpleasant but they don’t go away on their own. Everyone should be on the same page to enforce your credit policy and to maintain customer satisfaction.
14. Access accounts receivable regularly
Stay on top of cash flow by reviewing your accounts receivable on a weekly basis. You can identify bottlenecks in your debt collection system that require tweaking. You may need to switch to shorter payment terms or cash-only transactions.
15. Begin collection proceedings
If customers refuse to pay, you can hire a lawyer to send a final letter letting them know you intend to begin collections proceedings. If you’ve rather avoid those additional costs, it may be possible to write off the unpaid debt as a business deduction.
Other Questions on Accounts Receivable
What does an accounts receivable clerk do?
An account receivable clerk is an accounting professional who ensures your business receives from your clients the payments agreed for the services or goods delivered. This involves sending bills and bill reminders, recording all transactions to an accounting system, and making bank deposits.
What is AP and AR in accounting?
AP stands for “Accounts Payable”: the money that a company owes to its suppliers or vendors. AR stands for “Accounts Receivable”: the money owed to the company by its buyers of goods and services.
Are accounts receivable an asset or a liability?
Since accounts receivable refers to the amount owed to a seller by a customer, it is an asset. Sooner or later it will convert to cash, usually in less than one year. Don’t forget to list your accounts receivables as current assets in your balance sheet.
Be Proactive About Your Accounts Receivable and Cash Flow
As a rule of thumb, the majority of clients don’t pay upfront and may forget to pay their bills. That’s why it’s important to follow a credit plan you’ve set up to ensure your business has a steady flow of cash.
In a perfect world, your cash flow never dips below where it should, except sometimes it does. That’s when a business loan can provide working capital when your business is low on cash.
Camino Financial offers small business loans and funding options compatible with your business needs. After completing an online application and submitting basic financial documents, it’s possible to receive funding in 4-10 business days. Contact us today and work with a financial specialist to explore what type of loan works best for your finances.