Why Managing Accounts Receivable Could Save Your Business
Cash flow management is essential for small businesses. According to a recent study cited in Entrepreneur Magazine, a bank found that as many as 82 percent of businesses fail due to cash flow management issues. Cash flow is essential for everything from paying your staff to acquiring the inventory needed to serve customers. There are many ways to address cash flow problems, from taking loans to negotiating better credit terms with suppliers and lenders. Yet, cash flow problems are largely avoidable with a clear strategy. One of the most effective ways to establish a sustainable cash flow for your business is proactively managing your accounts receivable. Here’s a closer look at five ways that businesses can maximize the cash from their accounts receivable and help avoid a cash flow crunch that can damage their business.
Evaluating Credit Terms
When a customer receives an invoice from your business, what are the payment terms? Options range from due upon receipt to payment due in a certain number of days, anywhere from net 15 to net 120. Generous credit terms improve your customer’s cash flow position and may persuade them to do business with you.
But being too generous with credit terms can damage your own company’s cash flow. It’s important to strike the balance between meeting customer needs and creating a plan that’s workable for your business. Before establishing credit terms for your customers, project your own internal cash flow needs and use that as a metric for the policies that you set.
How quickly do you invoice clients after you deliver their product or service? Promptly invoicing is an important component of managing your accounts receivable. On a basic level, promptly sending your invoice reinforces the image of your company as professional and thorough. It subtly conveys to accountants that you take payment seriously. When a customer is in financial difficulty, accountants face difficult decisions on who to pay first. They’re less likely to delay payment to a company that takes accounts receivable seriously.
Getting your invoice in the system also anticipates that payments may require multistep approval processes on the customer’s end. Finally, payments are often handled in batches on a weekly, biweekly or monthly basis. The sooner you submit your invoice, the sooner you can expect to be paid within a customer’s payment and approval cycle.
Accounts receivable Monitoring
Once the invoice has been sent, customers have a specific amount of time to pay based on their credit terms. It’s important to actively monitor where in the process each payment due stands. By actively monitoring your accounts receivable, it’s possible to follow-up immediately when a payment is running late.
Follow-ups can help reveal oversights, payments lost in the mail or other easily corrected issues. It can also flag a problem customer early in the process so that you can determine the best way to move forward with collecting payments. Acting without delay gives you the best chance of getting monies owed.
Collections and Further Actions
When it’s clear that an account is headed for trouble, it is important to decide what action must be taken. Businesses need to balance collecting payments with maintaining the integrity of customer relationships. There are numerous ways to address delayed payments. For example, some businesses will grant a brief extension in exchange for interest or a convenience fee.
Others may offer a payment plan to get some money coming in to the business, while offering their customers some flexibility in repayment. Working with a collections agency or a lawyer is usually the final step in collecting delinquent payments from a customer. It’s important to have a plan in place for your business when these situations occur. Some discretion can be used on a case-by-case basis, but knowing what to do when a problem arises can help you resolve these issues more quickly and efficiently.
Automating Accounts receivable
Even businesses with full-time accountants can find that managing accounts receivable is a time-consuming and overwhelming process. Manually tracking each payment due in a spreadsheet or similar application creates unnecessary administrative work and opens up the possibility of errors. It also makes it harder to be on top of late payments and to ensure that you’re always invoicing promptly.
Businesses that rely on accounts receivable for cash flow should consider a financial system that helps them automate the process. The right financial system can drastically reduce the amount of time you spend on each step of the process. For example, templates make it easy to quickly send professional invoices with just a few clicks. Alerts can email you the moment that a payment is overdue so you never miss a timely follow up.
Companies need reliable cash flow in order to stay in business. Managing your accounts receivable is one strategy for keeping your bank account flush and a steady influx of money on the way. But managing your accounts receivable requires a plan for evaluating credit terms, invoicing promptly, monitoring the status of payments and having a clear plan for following up when customer payments are late. Avoid cash flow difficulties by putting a clear plan in place now that can help you achieve your goals and know how to react when things go wrong.