If you're running a small business but spend every month stressing about your cash flow, then it's probably time to reassess your accounts receivable policy.
With just a few simple adjustments, you'll be able to develop a more secure process with credit control software that makes your life that much easier.
You're free to focus on your real business goals by taking away the administrative hassle of accounts receivables. Let's take a look at how you can do this.
What is an account receivable vs an account payable?
Just because you have a business doesn't mean you know everything about accounting. That's okay! It's a learning curve and we're here to teach. Simply put, accounts receivable and accounts payable are related. (Here's a resource for some light reading when you're ready; Accounts Receivable Meanings and Definitions for New Business Owners)
- Accounts receivable is considered a business asset because this is money that your clients owe you. When payment is received from your clients, cash is debited and accounts receivable are credited on the balance sheet.
- Accounts payable is a liability in that it is the money that you owe to your suppliers. As a liability account, accounts payable will have a credit balance. Any credit entry will increase the balance in accounts payable and a debit entry will decrease the balance.
What are accounts receivable examples?
Many businesses will operate using accounts receivables. Some examples of these include:
- A plumber repairs a leak at a client's house for £120 and issues an invoice for the outstanding amount. This will be recorded by the plumber as accounts receivable until the amount is paid in full.
- An electricity bill of £250 is issued at month-end. This outstanding amount will be recorded by the utility company as an account receivable until paid.
- …you get the idea!
Tips for drafting an accounts receivable policy
The concept is really quite simple, but if you don't keep on top of your accounts receivable, your cash flow – credit sales and business operations – will come to a grinding halt. Here are a few tips for drafting an effective policy that will revolutionise your small business.
1. Create an ageing report
The first step in implementing a new accounts receivable policy is to understand what's owed right now. Do a thorough assessment of your current collections by creating an accounts receivable ageing report.
This will include the number of days since the invoice was issued, and the amounts due. Keep this updated on a weekly basis.
- Accounts receivable turnover (ART) ratio
Figuring out your account receivable turnover is an important element in creating an ageing report. An explanation of the formula involves:
Calculating your net credit sales - This is where you subtract your sales returns and allowances from your credit sales.
Determining your average accounts receivable - This is done by adding your beginning accounts receivable balance to your ending accounts receiving balance and halving the total.
Dividing your net credit sales by accounts receivable - This gives you your accounts receivable turnover ratio
A simple formula:
For a simple view, you can use the following formula to determine how often your average accounts receivable collection takes place. The formula is:
If you have delinquent accounts with an ART of 10, your average account receivable was collected in 36.5 days. This will assist in creating an ageing report much faster.
2. Get a larger client base
Although this is not strictly limited to accounts receivable, getting a larger client base will help with cash flow and improve the running of your business. It's great to land a big corporate, but their payment terms can extend up to 120 days, which means you'll need smaller clients to keep up with late payments.
3. Know your customer
We don't expect you to have a weekly cup of coffee and go on family holidays with our clients, but you need to do a bit of a credit check to ensure your customer is reliable. Do some research to ensure they're a registered entity with a good track record.
By sorting this early in the process and looking into their financial statements, the process is much easier down the line.
There is a lot less risk for you this way and whether you're sorting student accounts or those for a small business, it prevents you from having to get a collection agency in the future. A successful accounts receivable management system is essential for preventing bad debts and fostering strong relationships with customers that are set to last.
By getting to know them from the off and setting payment terms and clear billing procedures based on individuals rather than judging everyone as a whole, it can really help further down the line.
4. Develop clear procedures
It's important to actually outline a procedure for your accounts receivable management – and to follow this procedure without fail. What is the payment period and structure for average accounts receivable? How do you handle invoicing, late payments and customer data management? By putting the correct steps into place, and following through on them, you should see faster payments month-to-month.
Below we will touch on some of the procedures you should consider implementing. If you find payments go past their due date and your collections process isn't working, you might need to speak to collection agencies who can help.
You might want to put payment options or collection processes in place that are designed for when payment terms have not been met. These clear procedures should be outlined to everyone in your team, particularly those with internal controls over the accounts receivable management software who will be chasing the clients in question.
5. Send clear invoices promptly
Don't take your time when invoicing or it sets the tone for the customer that delays are acceptable. By sending out your invoices promptly, you're letting your customers know what you require from them. Make sure to clarify, within your invoice, the payment period so that there is no confusion. The simpler, more direct the invoice, the better.
Even if this is a regular customer, just alert them to the fact that you're implementing a new system and delays won't be tolerated.
Have a clear due date and don't be afraid to add late fees to an outstanding balance in the case of a late or non-payment. This can help avoid payment issues and assist with receiving the money you're owed when it's past due.
6. Make payment systems easier
The more convenient you make the payment options for your clients, the more likely you are to get paid. It's really that simple. Electronic payment portals are great as they let your customers pay with credit or debit cards through a mobile app. If it suits your business model to set up recurring payments, this can also be done through payment portals.
A good payment portal can help avoid payment issues and it makes the process of collecting payments easy. An effective accounts receivable management system is an effortless way to improve the way you organize your accounts and receive payments.
7. Implement a discount policy
Where feasible, offering clients a discounted rate for prompter payments – or even extending credit only for payments made ahead of time – is a great incentive and a way to get on top of your accounts receivable. In tough economic times, where every cent counts, this is a great option to consider.
Outstanding invoices can be the bane of many business owners, so by simplifying the billing process and adding an incentive to customer invoices, they are much more likely to pay on time or even early.
You could include this in the client's payment plan and tell them early on that if they make payment promptly, they will be rewarded for this.
8. Track overdue invoices
Managing your own accounts receivable process means following up on any overdue invoices as soon as the time is up. Included in your procedure should be how you track invoices and when.
You can choose to set up an SMS or email system, but remember that it must be polite but firm. It could also provide your client with payment options to ensure payment is made, even if not all at once.
Keep track of the invoice number and billing statements, ensuring billing contact information is up to date. This makes it much easier to chase up overdue payments and your collection efforts will be less futile.
Late payments can be very detrimental for companies, particularly small businesses that don't have a large cash flow, so keeping on top of the collection process is vital.
Whether it's student accounts or those belonging to a fellow small business, all overdue invoices need to be properly tracked and the correct steps taken.
9. Consider payment plans
Often a client might be having cash flow challenges – possibly as a result of poor accounts receivable management! You can assist them by implementing a payment plan to assist in securing prompt payment of your outstanding amount.
This is a great way to show customer support and instil customer loyalty. Make sure the payment plan is provided in writing and signed by both parties.
Payment plans are a good option for collecting revenue when the business in question is struggling and can help to build a bond between you both as well as ensure you receive the money owed to you when it's past due.
If not, the company might not be able to pay at all and you could end up having to write off their debt. With effective management of payment plans, it can work out well for all involved and means no one misses out.
10. Outsource accounts receivable
Even a small business can suffer great losses when accounts receivable isn't implemented properly, and often it's a case of needing to outsource the process to a third party.
The benefits of outsourcing your credit control to Chaser include:
- Reducing costs: rather than using an in-house credit controller or wasting valuable time on accounts receivable policies yourself, you're saving costs by benefitting from financial expertise.
- Reducing debtor days: by leveraging receivables policies that work, Chaser ensures you'll be reducing debtor days and improving cash flow quickly.
- Avoid bad debt: through these effective policies that actively monitor your customers, you avoid the risk of bad debt.
- Customer experience: Chaser's friendly and professional team takes a customer-first approach that maintains great working relations.
Get in touch
If you are looking for help setting up your accounts receivable policy and process, get in touch with Chaser's accounts receivable experts who will help you set up and improve your credit control process, so you can get paid on time and maintain a healthy cash flow
