If you're a small or medium-sized enterprise, then it's important to have a good understanding of accounts receivable. This is the process of collecting payments for goods and services that have been delivered.
It can be a challenge to manage receivables, but there are several strategies that you can use to make the process easier, ensure consistent cash flow, and reduce instances of bad debt.
In this article, we'll discuss some of the most effective methods for managing your receivables.
What is accounts receivables?
Your accounts receivable (AR) is the total amount of money that you are owed for goods and services that have been delivered but not yet paid for. It's important to keep track of this figure, as it can have a significant impact on your company's cash flow.
The goal of accounts receivable management is to ensure that you get paid for what you're owed while also ensuring that you don't extend credit to customers who are unlikely to pay. This can be a difficult balancing act, as unpaid invoices are one of the largest challenges facing UK SMEs.
Across the UK, SMEs are owed £67bn in unpaid invoices and late payments, leading to the potential closure of 400,000 small firms every year.
So what can you do to ensure your business isn't one of them? Here are a few accounts receivable strategies to help you get paid on time:
Accounts receivable strategies
There are several different accounts receivable strategies that you can employ in order to improve your cash flow, including:
Sign contracts before the work begin
Making sure that your customer is fully aware of what is expected of them and what will be delivered, as well as when payment is due, can help to reduce the number of unpaid invoices.
Communicating your terms and conditions clearly and up-front can also help to avoid confusion or disputes down the line.
Confusion over overdue dates, payment dates, and what is included in the service can be the root cause of many disputes, and having everything communicated and agreed upon by both parties can help to avoid this.
For example, setting a specific date for payment rather than saying that the invoice is due within X amount of days can help to clarify what is expected of your customers and what you expect from them in return.
Additionally, if there is a dispute down the line, it can be easier to track what was agreed upon if it is all in writing. Having those kinds of details agreed upon in the advance can help to smooth out the process and ensure that everyone is on the same page.
Billing/invoices
Invoicing promptly and accurately is another key accounts receivable strategy that can help to keep your business cash flow consistent.
Failing to promptly invoice a customer for services rendered or incorrectly invoicing them can lead to late payments, which will impact your bottom line.
Therefore, it is important that you invoice clients as soon as possible after the work has been done or goods delivered. This can help to reduce the potential for disputes and delays in receiving payment from customers.
You should also check what details are required on your invoices and ensure that everything is correct before sending them out so that there are no delays in getting paid.
The common details that should be included in every invoice are:
- the date of the invoice
- the name and contact details of your business
- a description of what is being invoiced, including the quantity and unit price (if applicable)
- the total amount to be paid by the customer
- any discounts that are being offered
- payment terms (e.g. net 30, 60 days, etc.)
- the signature of an authorized individual
Establish a credit control policy
An effective credit control policy is the foundation of any accounts receivable strategy. This policy should set out the rules and procedures that your business will use to assess a customer's creditworthiness and determine what payment terms to offer.
Some key considerations for your credit control policy include:
- The minimum amount of time you'll wait before issuing an invoice
- The maximum period of time you'll extend credit (e.g. 90 days)
- The payment terms that apply to different customers, depending on their credit rating
- When and how your company will follow up after an invoice is issued to ensure it's being paid
- How much interest you'll charge for late payments and what actions you'll take if a payment is more than 30 days overdue
- What to do if you suspect that a customer isn't going to be able to pay their bill
Having this kind of credit control policy in place will help to ensure both staff and customers understand what your expectations are.
It will also help to avoid taking on customers who have poor payment histories or poor credit histories.
It should be noted that the credit policies of different companies will vary depending on what industry they're in.
If you have a look at what other businesses in your industry are doing, you'll get a good idea of what's normal for your sector.
You can then use this information to guide what you decide is appropriate for your own company. You can also make use of our credit control policy template as the basis of your own credit control policy.
Track your accounts receivable
Keeping a close eye on what money is owed to you and what's outstanding will ensure that you get paid promptly.
There are a number of tools out there that can help you do this, including dedicated accounts receivable software.
If tracking your customers' debts manually, it's easy for information to be lost in the process for invoices to fall through the cracks. By transferring to a digital system, you can cut down on these risks and ensure that all payments owed to your company are accounted for.
Knowing which accounts are up to date and which are outstanding will allow you to identify what customers are behind on their payments, what's owed, and what the next steps should be.
This information can then be used to ensure that your invoices are paid promptly and in full, reducing instances of bad debt.
Setting up automated reminders will help you highlight any outstanding accounts receivable and follow up on them in a timely manner.
Adopt accounts receivable automation software
The main issue with constant monitoring your accounts receivable is that it takes time, and time is money, especially for smaller businesses.
One of the best ways to overcome it is to automate as much of the process as possible. Using automation software for accounts receivable will help to speed up the process, as well as reduce the chances of human error.
This can be done by using specialized software that will keep track of all your invoices, customers, and payments.
Not only does this free up your time so you can focus on more important tasks, but it also allows you to have a real-time view of your accounts receivable, which can help you make better decisions.
Chaser offers full accounts receivable management software that can help you automate your accounting processes and get paid faster.
Our Payment Portals allow you to offer the widest variety of payment methods to your customers and help you get paid faster.
It also gives you greater control over what data is shown to your customers, what payment methods are available in each country, what support information you want to include on the invoice and more.
Using Chaser’s reminders, what used to be a manual task of sending an email or snail mail invoices is now automated with our system which sends out automatic email reminders for outstanding invoices.
It also allows you to access your customer data and invoices from anywhere in the world, allowing you to make better decisions about your accounts receivable.
If you’re looking for a more comprehensive accounts receivable software that can help you manage your cash flow, Chaser is the best solution for you. To find out how Chaser can help you get your invoices paid faster, book a demo with us today!
Using the right strategy for success
There are many different strategies that companies can use when it comes to their accounts receivable. By using some or all of these different strategies, businesses can ensure consistent cash flow and reduce instances of bad debt.
Each of the options we've listed has its own set of benefits, and it’s important for businesses to understand which option will work best for them.
