One of the key areas that will determine the strength or weakness of your cash flow is your accounts receivable. Effective management of your accounts receivable ensures your business is paid on time, reducing your overall financial stress.
Effective management will ensure that your business not only gets paid on time and reduces your overall financial stress, but also operates more efficiently and effectively because you have the cash flow coming in the door.
What Is Accounts Receivable
Accounts receivable is the money owed to your business by your customers. This is money you have delivered the service for; you’ve delivered the product, and you’re waiting for them to mail payment for those open invoices.
Accounts Receivable for Business
Typically, it takes customers 30, 45, 60, or sometimes 90 days to pay those invoices. The problem occurs, though, on the other side of your business: you have vendors, suppliers, employees, and overhead expenses that can’t wait until you collect that money from your customers. So the trick is to get your customers to pay faster.
Set Clear Payment Terms
Set clear payment terms and communicate them upfront to your customers. Ensure that you have defined the due dates, late fees, and whether there are discounts for early payment as well. Have these payment terms included in contracts, invoices, and any client agreements.
Send Out Invoices Promptly
Be sure that invoicing is prompt and accurate. Invoice right away; do not wait. Always check the details of your invoice before sending it, because you don’t want to send an invoice that needs to be corrected; it’ll just take longer to go back and forth.
Get in the habit of blocking off time on your schedule every week, or for a larger business, twice a week or every day, to send out invoices. Those customers are super excited to pay you because it’s fresh in their mind about the awesome service or product that you’ve just delivered to them, and it gets it in their payment cycle so that the 30, 45, 60-day payment cycle happens sooner rather than later.
Make sure you send your invoices correctly. There’s nothing worse than getting an incorrect invoice from someone. If it comes in wrong, it goes to the bottom of the stack and gets piled up with other papers.
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Speed Up Payment
Maybe you can invoice your customers at the front end, before your service or product is delivered. If you’re doing a longer project spread out over a couple of months, maybe you can use installment billing: collect a 50 percent down payment upfront, the remainder at the time of delivery, or use installments.
Percentage of completion is a method some industries use, where you bill based on how complete the project is each month; that way, you’re getting cash that helps you pay your vendors, subcontractors, and employees while the work is happening.
Offer a Prepayment Discount
Consider offering or setting up a prepayment discount; it works really well, especially if you’re working with larger companies. You can offer a 3%, 2%, or 1% payment discount; if they pay within 10 days of the invoice, they get a 3% discount. Some companies will actually take advantage of that because it saves them money; on the flip side, for you, you get paid faster.
Collect Credit Card Information
Think about collecting credit card information up front and letting them know, as soon as you deliver the product or service, that you’re gonna charge their card. You’re no longer waiting on them to write the check, put it in the mail and send it to you.
Provide Multiple Payment Options
Providing multiple payment options to customers also helps. The more options you have, such as credit cards, e-transfers, and online payments, having these options available to your customer will make paying easier and more convenient. You can automate invoicing and reminders; just like automating payments too as well, you can schedule reminders before and after due dates when it’s late.
Monitor Aging Reports Regularly
Make sure you review the accounts regularly; you need to know what’s going on. Monitor your accounts receivable reports weekly to identify which accounts are overdue. Focus on collecting high-value or long-outstanding invoices.
Enforce Collections Policies
Have collections policies in place and enforce them. Be consistent with your reminders; that’s one of the most important things: just reminding people. Provide incentives and penalties: offer discounts for paying early and penalties for paying late.
Build Strong Customer Relationships
Maintain open, consistent communication with your customers; build strong relationships. Having that positive relationship means that when difficult times or anything comes up, you already have a relationship to build on and use to talk to them about the financial issue.
