Accounts Receivable Management: What Small Businesses Need to Know

Accounts Receivable Management

Accounts Receivable Management

Making a decision based on anticipation alone might be risky. On the other hand, it would be unwise to write out the possibility of future benefits. That is especially true for business owners, who must be able to forecast future events and change their strategies accordingly.

Whichever business you’re in, keeping track of anticipated profits in accounts receivable is an integral part of asset management and keeping tabs on your success rate. Payment delays affect every element of your company. You rely on these payments to make purchases and cover your expenses.

Would you wish to break this loop? This article will look at what small businesses need to know about accounts receivable management.

Accounts Receivable Assessment

An accounts receivable assessment will offer insight into your company’s overall health. It is a method to ensure you’re managing your cash flow.

Look at the accounts receivable to sales ratio. Then examine your accounts receivable client base. If you only have a single account with a significant balance, this could foretell future difficulties. It indicates that you are reliant on one client to pay your bills. Expand your client base to lessen the vulnerability of your company.

Watch for Red Flags

Even the most effective accounts receivable management processes have flaws. If you are aware of the alarm bells of accounts receivable, you will be able to determine if your system is off.

Do not delay in following up. The longer an invoice remains unpaid, the less likely you will receive payment. It is optimal to follow up during the first thirty days. A client who proposes partial payment may be experiencing financial difficulties.

Draft a contract that the customer can adhere to. If they completely ignore your calls, it is a red flag that they do not intend to pay the amount. You’ll need to exert force to get the payment.

Set Up a Collections Management System

The most effective payment collection procedures are routine and systematic. Most business owners lack a systematic method of tracking their accounts receivable.

Scheduled invoicing days should be the hallmark of your accounts receivable management process. You could do it once a week or a few days a month, depending on the number of customers.

Accounts Receivable Management Basics

if given a choice between cash and accounts receivable, most entrepreneurs would likely opt for the former. Nevertheless, not every small business operates using a cash-based structure, and you’ll need to prioritize the collection of money owed to you by customers.

Thus, mastering the account receivables process is essential if you want to manage receivables effectively and receive payments on time. Here is a complete breakdown of what you need to know to help you get started with accounts receivable management.

1. Bankruptcy

When a customer who owes you money declares bankruptcy, your initial impulse may be to attempt to collect the debt. You might end up in court for violating the bankruptcy code.

It is now the court’s responsibility to resolve the matter, so you’ll need to be patient while the bankruptcy process unfolds. While you wait, continue with the presumption that you won’t be able to recover the money back, and consult your accountant about deducting the loss from your taxes.

2. Customer Relationship Management

Customer Relationship Management is related to sales; however, many people forget that managing payment is part of the sales cycle. Making a sale is nothing unless and until you receive payment. Thus, you should approach accounts receivable management in the same way that you would CRM.

You’ll need to establish a routine to document any communication with clients regarding payments to keep your staff updated on the status of payments and manage your collections process effectively.

3. Electronic Payments

You’re inviting clients to make late payments if you don’t allow electronic payments.

Allowing online payments will encourage your clients to pay faster in line with their preferred payment mode and eliminate the need to wait for mailed checks, accelerating the cash flow cycle.

4. Financing

If you’re having problems with clients remitting late payments and extended payment terms, financing your invoices might be the solution. Increase your liquidity by converting your outstanding payments into cash.

Most invoice finance providers focus on funding startups and give up to a 90 percent advance on your accounts receivable.

5. Guarantee

There is always an element of risk when extending credit to clients. You can never be sure if someone will pay or not. Nonetheless, you can rest easier knowing that you are safe with receivables insurance.

Simply put, accounts receivables insurance is protection against losses resulting from unpaid invoices or other obligations extended to customers. You will be covered in the following instances:

  • Your customer files bankruptcy.
  • Your customer goes out of business.
  • Natural disasters hinder them from paying you.

6. Help

There will always be customers who, no matter what you do, will not pay on time. Don’t hesitate to ask for assistance if past-due accounts are eating into your business’s profits.

To learn more about your alternatives, use a CRM for accounts receivable management, and consider contacting a collections agency, your accountant, or a lawyer.

7. Invoices

Regarding billing, your language might influence when you receive payment. For instance, adding a “please” or “thank you” can boost your likelihood of receiving payment.

Avoiding jargon such as “net terms” and being more explicit with a statement like “14 days to pay” can result in quick payment.

8. Jargon

The vocabulary used in accounts receivable is very technical and may seem alien to those who are not proficient. Therefore, if you talk about remittance or net terms to a client, they may not understand what you mean.

Ensure your message is understandable by employing more widely used terms, such as “payment” rather than “remittance.”

9. Keeping in Touch

It’s easy to fall behind on bills sometimes. For instance, you receive a bill while in the mail, but you get distracted and put it off, and then other things start piling up on top of it. That is why constant reminders to clients are so important.

You may assist your clients in making on-time payments by calling them or mailing them a payment notice. Reminders will increase your successful collection rate.

10. Late Payment Explanations

You’ve undoubtedly heard every justification for a late payment there is. Some of the most challenging explanations to reply may come from your best clients attempting to appeal to your softer side.

Keep in mind that you are operating a business, and you need to set the example of gently but firmly reminding people who owe you money that payment is due promptly.

11. Negotiate

If a client informs you that they will be unable to make a timely payment, one tactic you can use is to negotiate a payment plan with them. The whole sum due will not be paid immediately, but you will receive payments in installments over an extended period.

Doing so will allow you to manage your cash flow better and may even save your relationship with them.

12. Organization

Accounts receivable management entails ensuring that nothing slips between the loopholes. You should never find a payment that is ten months past due. The time to begin organizing your collections is now.

Once you send bills, how do you keep track of them? Where do you record your contacts with clients concerning their bills? Uncover a system that works for you, and start using it immediately.

13. The X-factor

Never forget that you’re in charge of issuing credit to clients. You can terminate a client’s trade credit at any time.

Anything from a client’s payment history to a failing relationship and intuition could be the x-factor that sways your judgment in a way that benefits your company.

14. Rewards

Although you may provide your clients trade credit, getting paid as soon as possible is in your best interest. Encourage your clients to make early payments by giving incentives. One of the most prevalent incentives is to provide a discount on the payment if the client pays within a specific time frame.

15. Do What You Think Is Best for Your Business

Remember that you are never obligated to take any action related to receivables management that makes you uncomfortable. If you don’t feel comfortable extending credit to a certain client, don’t.

Calling a client to ask for money is never a terrible idea because you deserve it. Don’t worry if an invoice is paid with financing or turned over to a collections agency. Remember that you are in charge here. It would help to decide how much work is acceptable in exchange for payment.

Final Thoughts

You can’t afford to ignore the accounts receivable side of your business. The inability to pay your suppliers and staff on time resulting from late payments is a serious problem that can’t be ignored.

If you’re a small business owner, we hope the article’s breakdown of accounts receivable management basics has been helpful.

About Sashi 549 Articles
Sashi Singh is content contributor and editor at IP. She has an amazing experience in content marketing from last many years. Read her contribution and leave comment.

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