Ins and Outs of Accounts Receivable for Small Business
You may call it bills receivable, or simply invoicing. By any name, it’s crucial to the success of your business to get paid the money you’re owed on a timely basis. Here are our top tips for effective accounts receivable management.
Accounts Receivable Activities
Accounts receivable isn’t just a number, it’s a process. It starts with sending invoices and continues through recording payments as they come in, keeping track of due dates, pursuing late payments, and checking that the payment matches the invoice.
Tracking Late Payments
First, you need to be aware when a payment is late. Your accounting software should be able to generate an aging report, which lists past-due invoices in order from least to most number of days since the due date. Do this regularly, because the longer you wait to pursue payment, the less likely it is that you will ever get paid.
Encouraging On-Time Payments
Incentivize your customers to pay on time by having a late fee policy, which you spell out on the invoice (and in the service contract). Another possibility is to offer discounts for early payment.
Pursuing Overdue Invoices
Make an action plan for reminding customers that their payment is late. Options include sending a past due invoice, writing a letter, emailing, or calling to speak to them in person. You will also need a timeline: for example, send a 2nd notice invoice at 1 week past due, email at 2 weeks, call at 3 weeks.
If that doesn’t work, you’ll need to move on to stronger tactics, such as cutting them off until payment is made, turning the matter over to your lawyer, or selling the debt to a collections agency.
Selling Your Invoices
Relieving yourself of a delinquent invoice isn’t the only reason to sell your debt. You can also sell current or slightly aged invoices to get cash fast or use them to secure a loan; this is called accounts receivable financing. Finance companies will pay up to 90% of the value of an invoice. But they won’t touch really old invoices, so don’t expect to go this route to get rid of bad debts.
Discuss the pros and cons of accounts receivable financing with your accountant or financial advisor.
Writing Off Bad Debts
If an invoice is 6 months or more past due and you’ve made every effort to get payment, face the fact that it probably will never be paid. The next step is to write it off as a bad debt in your accounting records. You will need the record in order to claim a tax refund if you’ve already paid tax on that expected income.
More Strategies for a Good Accounts Receivable Process
Maximize your chances of on-time payments with these steps:
• Run a credit check before agreeing to supply your goods or services to a business
• Get a signed agreement on payment terms before starting work
• Get a personal guarantee which gives you the right to sue the business owner personally – rather than his/her business – for unpaid debts (save this one for those with a bad credit record)
• Send your invoice immediately after work is done
• Track the customer’s payment history with you, and deal with those who are consistently late payers (change payment terms or stop doing business with them)
• Make it easy for customers to pay you with options such as debit card, credit card, direct debit, or automated clearing houses such as PayPal and Stripe
As we’ve seen, your invoices are one of your most valuable assets. And for small businesses in particular, getting paid on time provides that all important cash flow. Smart, consistent accounts receivable can be your golden key to surviving and thriving.