How accounts receivable works
When clients owe you money. you shouldn't have to move heaven and earth to collect it from them. If your accounts receivable system is a few years old, or still just consists of an Excel spreadsheet and invoice letters, then it is probably time for you to take some simple, additional steps to ensure that you get paid promptly and in full.
If you're spending an hour a week on managing your billing process, experts say that something is amiss. Slow collections can cost you tremendously over time, in the form of wasted labor, poor cash flow, and inaccurate financual forecasts. Plus, a solid accounts receivable system has a tendency to being self-fulfilling: The more professional your billing system is, the more likely it is that your clients will pay up in a timely manner.
"If you've taken the leap of faith to go into business for yourself, driven by the passion for what you do, you want to spend less time fretting over the books and a lot more time doing what you're great at—so you can get paid for it," says Mitch Solway, a small-business finance expert who is the vice president of sales and marketing for online expense-tracking software FreshBooks. "But it's still a critical piece of your business."
Streamlining Accounts Receivable: Invoicing Software
If you are sending out – either digitally or in hard copy – more than a handful of invoices a week, you should be using an accounting program such as QuickBooks or Peachtree. Or, if you like the style of online money-management programs, you might work well with an online system such as FreshBooks or Outright. If you're not already comfortable with any new software options, you can take a class or hire a coach to get you started. What's not an option is letting someone else do it all for you, says San Francisco-based financial advisor Kathryn Amenta.
"I would recommend a business owner understand their finances fully before they turn it over to someone else to handle," she says. "It's super important as an owner to have a finger on the financial pulse. That's the bottom line – that's why you're in business."
Once you know the process thoroughly, good software can help you track receivables, including how many invoices have been sent, how many have been viewed, how many have been paid, and how much remains outstanding. The only thing to keep in mind when you automate: Before you adopt a new software or billing process, make sure your clients are notified ahead of time of any changes that will affect them or how they receive or pay their bills.
The best invoices include every relevant piece of data, including hours billed if you're a service, or all the specs of a product if you're a sales organization. Being clear with clients avoids the need for follow-up questions on items that may be confusing to anyone who receives them, and that can delay payment. Your invoice should be a clean, straightforward document that includes your company logo. That said, it can contain a certain element of grace, suggests Mitch Solway, the vice president of sales and marketing at online bookkeeping and invoicing company FreshBooks, which has recently studied its customers best practices in accounts receivable.
"One of the best pieces of advice we've uncovered in recent months is to think carefully about the actual wording on the terms you apply on your invoices," Solway says. "Being polite and asking for payment within 21 days seems to get our customers paid a lot faster than terms such as 'due on receipt' or 'due immediately."
In other words, giving customers a bit of flex room actually appears to create common good-will and speed up payment. That's just one example of the complex psychology of money manifesting itself in the receivables process. Knowing your clients well, and understanding what motivates their accounting – and accountability – can help you implement other strategies in the future to get paid without being unfriendly.
Streamlining Accounts Receivable: Optimizing Your Billing Process
Whatever software you choose, the goal is to stay on top of accounts and billing. That means monitoring when an account opens, the timeline of work being done, and when precisely a bill is to be sent. That can vary depending on the type of product or service you provide, but terms of payment should be clear to all clients before you provide anything to them.
Setting up expectations and payment standards first allows you to be in control from the get-go. Before taking on a new client, present to them the terms of the transaction. This can
be a payment policy on your sales-based website, or part of a formal contractual agreement signed by both parties before the start of your service – or something in-between. The important thing, experts say, is to put the terms of payment in writing.
The most basic item a terms-of-sale agreement should include is payment schedule. To determine a timeframe for payment that works for you and your clients, consider industry standards as well as what your business needs to maintain steady cash flow. Say you decide 30 days is a reasonable expectation. You should include that fact in your agreement, and note pay-by dates on future invoices. Consistency is crucial in maintaining clients' respect and trust.
You must also establish a clear-cut method for following up on overdue invoices. Set a clear schedule of, say, a call after the payment deadline, then a follow-up e-mail within a week, followed by another call. When making collection calls, be sure to first know your state laws and follow the Fair Debt Collection Practices Act (you can check out the text of the FDCPA at the FTC website ). It's the law dictating when you can and can't call a debtor (the guidelines are generally during business hours). Knowing your rights can also help you be confident throughout the process of collecting on bills – and doing so in a kind and conscientious manner can help you avoid the unpleasant process of enlisting a collections service or taking your client to small-claims court.
Streamlining Accounts Payable: Enlisting Outside Help
If you're still spending too much time billing for and collecting money rather than doing what you're good at, you might feel it's natural to delegate some of your bookkeeping responsibility to an assistant. Instead, consider bringing in someone at a higher level
• A bookkeeper or contract accountant to help you stay on top of maintaining accurate records
• A credit manager or accounts receivable clerk to handle billing and following up on invoices if the process is taking more of your time as a manager than is financially worthwhile for your business
• A collection service or officer to deal with large-scale long overdue bills
• A legal advisor if a client cannot pay up in a reasonable time frame and you think litigation may be necessary
Amenta, the financial advisor, suggests that an accountant with a regular monthly relationship with your company can help streamline the bookkeeping process by advising you on time-saving methods – and they can catch costly errors. Moreover, he or she will have your future financial health in mind.
"That person can also help craft a plan for going forward, say, a two-year plan," she says. "It's really important to look at: What is this business paying too much for? Is this business venture supporting itself?"
Streamlining Accounts Receivable: Keeping Tabs On Clients and Cash Flow
Whether you handle receivables and collect on them yourself or employ an accounts receivable clerk, the person who regularly deals with accounting should always keep an eye on slow-paying clients. Get to know the payment schedules of your regular debtors, and know when they tend to come up short.
If a client is regularly late, schedule a conversation with their bookkeeper or CEO. Without being accusatory, ask the person how you can help them to be more consistent in making payments to you. Sometimes, the answer can be as simple as synching your invoice numbers or shifting a payment schedule to an earlier or later date in the month.
However, if the company you're dealing with seems to consistently pay late and doesn't want to make an effort to change, you need to reevaluate the relationship. Have they effectively created a system in dealing with paying you and their other suppliers that amounts to supplier financing? If so, how much money are you willing to lend to your client?
Streamlining Accounts Receivable: Adding Safeguards
If your company deals with large accounts that may not always be reliable about payment, you might want to consider investing in payment insurance. Insuring your accounts receivable (after, of course, you have a solid system for billing and receiving set in place) can be a smart way to protect your sales against non-payment risks. Some policies can even protect you from the commercial risks that cause non-payment that you can't control, including if your client goes out of business, changes ownership, files bankruptcy, or is the victim of a natural disaster. Most policies also include coverage for general economic climate issues and seasonal hardships clients might encounter.
Dig Deeper: Additional Ways To Ensure PaymentSource: www.inc.com