Accounts receivable is a great way to understand your company’s financial position. It’s the money customers owe for goods and services they’ve received but haven’t paid yet, which gets added to an account in accounting terms called ” Accounts Receivables.” When you sell something on credit (with no up-front costs), this money owed to you or your business becomes part of what we call “accounts receivable.”
Accounts receivable form part of your Cash Conversion Cycle and, therefore, the starting point to ensure that you don’t wait too long for your cash. In this article, I will discuss strategies you can use to ensure you get paid on time every time.
Don't hand out credit like it's candy.
This is harder than it sounds. I often come across a new client, and one of the questions I sometimes asked is:” What is your annual turnover?”. Business owners are very proud of their success, so I will get the answer with a huge grin. As a business, you should be proud because it’s hard work.
Unfortunately, that grin disappears as soon as the next question, ” What does your A/R aging report look like?” comes up.
Don’t get me wrong, I am all for accounts receivables, and in most industries, it’s a must, but just because you should be utilizing accounts receivable to generate more business doesn’t mean you should give every business that walks through your door credit.
Not every business with a nice business owner who looks like he or she can be your next best friend will be good payers.
So the first step in doing this is to create a company policy where you state that the approval of the Charge Account depends on a minimum credit score. If the applicant does not qualify, don’t do it. Trust me, it is way better to have fewer sales if you are flush with cash than to have huge sales numbers, but 30% of those sales have been owed to you for more than 90 days.
Invoice on time and accurately.
Invoicing your customers more than a month after the service or product has been completed can lead them to move on mentally and make it easier for people to avoid paying. Smaller sums invoiced monthly works better than one large quarterly invoice.
You can expect that your customers will be more likely to pay you late if they receive vague or faulty invoices. So keep those details clear, professional, and on time!
Establish payment terms.
Set up payment terms with your customers, so they know their expectations. Request Net 30 days and include late charges if necessary for a smoother process.
If you create a great working relationship with your customers, they will be more likely to work with you and make sure that their payments are on time.
It is important to determine your payment terms based on industry standards. For example, if a customer in the finance industry usually pays within 60 days, but you offer them 30 as an alternative, you can lose out on a lot of business. Once you have determined the industry standard, be sure pro terms match it.
Provide a discount for early payment.
The early payment discount might be more than enough to outweigh the cost of collecting past due accounts, but you’ll have fewer worries if your customers are incentivized.
A great practice for businesses like yours is to set up terms that allow them a 1% discount when payments happen within ten days of the invoice date. This applies even if somebody owes 10 nets! If people want less hassle or higher cash flow right away, they will take advantage since there’s no risk involved with holding onto debts longer until interest accrues.
Penalize for late payments.
This is a necessary evil. Just as you reward your clients for paying early and on time, there needs to be a way to prevent clients from taking too long to pay. This is done with interest and late payment charges.
Please note that there are limitations to how much interest can be charged, and more importantly, the buyer was aware that they signed and approved the interest charges before the sale was made.
Use accounting software to keep track of accounts receivable.
Accounting software like Quickbooks desktop and Quickbooks online can help you track your accounts comfortably and easily with the click of a button.
This accounting software will also allow you to track and add billable expenses to customer invoices, import labor hours, and mark them up.
If you need help to set these services up, give me a call.
Allow payments to be made easily and effortlessly.
Get yourself set up for online credit card payments, yes there is a small transactional cost involved, but it is still cheaper to spend the time chasing your money. In some industries, setting the client up with a monthly payment plan might be easier, thereby doing a direct debit each month from the client’s bank accounts.
At Darwin Business Solutions, we use Plooto. It takes around 3 -5 business days for the funds to be available in your bank account, but the beauty is that this process can be completely automated.
Don't be scared to pick up the phone.
We all hate doing it, but you have sold the product or delivered the service, and you need to get paid, as your business also has overheads you need to pay. A quick courtesy call never hurts. If you encounter a rude client giving you the run-around, make a note and close the charge account immediately.
Only do cash sales from that point on.
Conclusion
You need to keep your finger on the pulse regarding accounts receivable. Not getting paid on time can quickly put your business into cash flow problems. Contact me if you need help setting up a credit policy.
