Having Accounts Receivable i.e. amounts owing by customers is both good and bad. It's good because it means that you have sales and customers. It's bad because it is cash that you don't have now, and there is always a possibility that you won't collect. When you offer credit terms to your customers it is extremely important to have a system in place to manage your accounts receivable. It is difficult to collect amounts due when you don't actually know how much you are owed or when it is due. Having the information at your fingertips (this really relates to any kind of information) also makes a great impression. Below are some steps to help manage and collect on your accounts receivable:
1. Track your Accounts Receivable with Software:
Given the abundance of free and cheap invoice creating and tracking software, the only reason not to use one is if you do not have a computer or a smartphone or if you are Amish (although they seem to have it going on). I usually recommend Quickbooks to my small business clients as it is cost effective and user friendly. However there are a plethora of choices out there.
2. Record Sales As Soon As Possible:
The sooner you invoice your clients and customers, the sooner you are likely to receive payment. Also, the customer is less likely to find problems with a prompt invoice as the goods or services provided should be fairly fresh in their minds.
3. Establish Credit Policies:
Before extending credit to customers, it is usually a good idea to assess their ability to pay. Keep in mind that credit checks are restricted to businesses with "permissible purpose". Costs are involved with credit checks, so if you are selling to Wal-Mart you can probably avoid the credit check. More information on credits checks can be found here
4. Alternative Payment Methods:
One way to reduce accounts receivable and extending credit is to offer alternate payment methods including credit cards, services like PayPal or good old fashioned cash. Although there are costs associated with credit cards, they are offset by having the cash up front and a reduction in administrative costs.
5. Discounts for Early Payment:
An excellent method to incentivize your customers to pay as soon as possible is to offer them discounts. One of the more popular credit terms is 2%/10, Net 30 Days. In English this means that a customer receives a 2% discount if they pay within 10 days and the total balance is due within 30 days of the date of the invoice (Repeat tip#1 - invoice as soon as possible!).
6. Review Accounts Receivable Regularly:
Many small business owners have a pretty good idea of what amounts are owing to them. However as wonderful as our brains and memories are, it is good to setup a process to review amounts owing by customers, regularly. The Accounts Receivable report can be generated on a weekly or monthly basis. This allows for systematic follow up of delinquent accounts.
7. Dealing with Delinquent Accounts:
Frequent follow up of delinquent accounts greatly increases your chances of collecting them. People will often prioritize payment based on how much of a hassle they expect to receive. Emails should be followed by phone calls. Of course when dealing with an existing customer, you don't want to be seen as harassing them. Communications should always be polite, yet firm and should ask customers to confirm when you can expect payment. In some cases it may be beneficial to work out a payment plan if a customer cannot pay all at once. Finally, penalizing delinquent accounts can be effective way to ensure timely payments. This can be done by levying interest on overdue balances or charging an "admin" fee. (just look at your utility or cell phone bill to see how this is done. These companies tend to be extremely effective at collecting overdue amounts.)
8. Insuring and Factoring Receivables:
It might be worth considering buying insurance to protect against uncollectible receivables. This works in the same way that insurance works, but can be somewhat costly. It works best when you have a lot of high value receivables and an experience of uncollectibility. There are often restrictions on types of customers and balance limits, but it can be a useful method to help mitigate losses.
It is also possible to "sell" your receivables, which is useful when you require cash flow quickly. Once again this tends to be costly and should only be used if absolutely necessary. Many companies provide both insurance and/or factoring and can be found through a friendly Google search. Alternatively, it may be worth contacting your bank or asking a business associate for a reference.
9. Submit to a Collection Agency:
If, despite all your effort, you are unable to collect, you should submit accounts to a collection agency. This is not ideal, but (as some people might know) collection agencies tend to be quite aggressive in their collection efforts. Also, they usually charge based on amounts collected so there is no upfront cash outlay required. If you have written off the amounts, then the amounts collected are somewhat of a bonus.
Managing accounts receivable can be pretty straightforward. Most customers tend to pay on a fairly timely basis. However, with proper tracking, frequent follow up and a coherent process, managing accounts receivable can actually be pretty simple. And for many small business owners, no matter how long we have been in business, it is always exciting to get that "cheque in the mail".
About the author: Ronika Khanna is a Montreal Accountant who helps small businesses achieve their financial goals. Please sign up to receive articles pertaining to small business, accounting, tax and other occasional non business topics of interest. You can also follow her on Facebook or Twitter.