Basically, Accounts Receivable is the invoicing, collecting and recording of money owed to you by your customers. It’s all very well to see an Accounts Receivable number in the asset column on your balance sheet — but what are you doing to turn that theoretical money into actual money in your bank?
Accounts Receivable as Asset
It’s important to keep track of how much money you have tied up in outstanding invoices (and debts not yet invoiced). As we mentioned above, this asset will be reflected on your balance sheet, so it must be accurate for you to know how profitable your business really is.
Another reason it’s an asset is that you can sell these debts to a finance company (for up to 90% of their value) if you suddenly need cash and can’t wait for payment. This is called invoice financing or accounts receivable financing.
If an invoice is way past due despite multiple attempts to collect it, this type of finance company probably won’t be interested. However, a debt collections company may buy it off you for a discounted price. (Better than a total write-off, right?)
Invoices should be sent in a timely manner. The easiest way to do this is with online invoicing software that completes the task in just a few clicks. As well as being emailed to the customer, the invoice is automatically entered into your bookkeeping and collections system.
Good software should also allow ways for the customer to make payment online, such as a credit card or bank transfer. This saves a lot of time for both your Accounts Receivable staff and your customers.
Next, you need a strategy in place for aging (overdue) invoices. Your accounting software should be able to automatically send past-due reminders, according to trigger dates you’ve established.
• How you will notify the customer: “2nd notice” invoice, email, snail mail, phone call
• At how many days past due each of these will actions be taken
• How many reminders you will send before you take the next step
• What is the next step: late fees, cut off sales until outstanding balance is paid, call in a debt collector or lawyer
Your software should also be able to generate an aging report, which shows you at a glance all your past-due invoices listed in order from least to most overdue. Review your report at regular intervals, so you won’t overlook any steps you need to take personally (that the software can’t do) to collect the debt.
If all your efforts to get the invoice paid have failed, the time has come to write it off as a bad debt. (And make a note-to-self to be more diligent in running credit checks on new customers in the future.)
You decide when that write-off will occur: after 6 months, 18 months or whatever. Be sure to include the write-off on your income tax return. If the customer does eventually pay, you can declare it as income on next year’s tax return.
Failure to collect debts is one of the top reasons small businesses go out of business. So it’s super important to make consistent, persistent efforts to get the money owed to you. If you don’t think you have the time or capability, Xendoo comes to the rescue with advanced bookkeeping software, an automated Accounts Receivable process, and expert debt management and income tax guidance.