It's Time To Rethink Your Accounts Receivable

YEC Council Post was written by Jennifer Barnes, Founder & CEO of Optima Office, LLC. Jennifer is a tenacious entrepreneur who enjoys jogging on the beach and snowboarding.

As a business owner, you know that accounts receivable (AR) is money owed to a business by its customers. When you extend credit to a customer for the purchase of goods or services, the balance owed is recorded in your general ledger AR account as future cash receipts. So, what happens when customers don’t pay on time? How can you prevent late payments from putting your business at risk? Offering flexible or liberal credit terms is a strategy that can be used to lure customers away from your competitors. Typically, you’ll need to offer credit as an essential aspect of your operation. Not unreasonably, customers typically won’t pay for services before they’re delivered, so a credit factor or cost should be built into your pricing.

The unfortunate reality is that customers don't always pay their bills on time. Without a strong AR collection process, late payments can quickly add up to a serious cash flow problem. After all, you need cash to pay your own bills. If your AR collection process relies on a vague or outdated system or your team doesn’t execute, you could have a problem that's costing your company thousands of dollars every year.

Signs Your Accounts Receivable Collection Process Needs An Upgrade

You might think that since you're not losing money, you don't have a problem. However, if you wait for problems to arise, it can be too late to repair the damage. Healthy AR aging enables you to watch for warning signs and avoid cash flow problems in the future. If you're unsure about the current status of your accounts receivable process, check for these warning signs:

? You wait too long to follow up. If you wait until the 90-day mark to send a late payment reminder, you're dramatically reducing the chances of receiving your money. The first 30 days after an invoice is received by your customer is the sweet spot for you getting paid. Consider sending your first late notice on the first day the bill is past due to ensure customers pay attention and let them know you’re watching.

? You get partial payments. Receiving a partial payment is better than none, but it’s an indication that your customer might be having cash flow problems. Follow up with your customers immediately to make sure they have no disputes with the invoice. If in that follow-up you learn that cash flow is indeed a problem, get a commitment for the balance owed (the amount and date), and monitor them closely to make sure they meet their commitment.

? Your DSO is too long. Your days sales outstanding (DSO) signifies the average number of days between the time of invoice and payment from your customer. Having a DSO longer than your industry average is a reminder that your customers aren't paying on time. This can be particularly dangerous for small businesses.

? Your customers avoid contact. Customers who ignore communications or dispute your invoice are displaying warning signs of financial difficulties. If any of your customers display this type of behavior, it may signal problems for your future collection attempts. You may need to consider legal or other aggressive action to collect the amounts owed to you.

How To Keep Your Accounts Receivable Current

Building a strong, reliable collection system is the foundation you need to keep your accounts receivable in check. However, setting up a solid accounts receivable system takes time and careful planning. You must be able to clearly follow a client's account from the point of credit approval until payments are complete. A typical process includes establishing dependable credit approval protocols and setting appropriate limits, delivering invoices in a timely manner, tracking paid balances and payments due and providing a regular account of the process.

Overdue payments are harder to collect. In addition, they cost you time and money in sending out reminders and communications to slippery customers. Having the right system in place can help you avoid collection costs altogether.

The following tips will help ensure that your accounts receivable remains an asset, not a liability.

? Keep your clients on ACH or credit card. Paperless billing is becoming more popular in practically every industry. Automated Clearing House (ACH) payments allow customers to set a date for payment and enables automatic deductions from a checking or savings account each month. Clients who aren't comfortable with the ACH process could use a personal or business credit card instead.

? Actively manage the process. You need to work your accounts receivable every day. As an owner or manager, you should receive regular exception reports that highlight accounts receivable issues.

? Offer discounts. Adding an incentive of a 1% discount for rapid payment won’t severely affect your bottom line. Offering discounts to clients who pay their invoices on time, however, can save you the hassle and cost of following up on late payments.

? Secure deposits. If ACH payments aren't a good solution for your customer base, consider a retainer or deposit requirement. This initial payment can become effective when a certain number of payments have been achieved on time.

? Be consistent. Let new clients know up front what is expected in terms of payment. Then, should they miss their first payment, call the customer immediately and address the issue at that moment, or stop by to talk face to face. If you say you need payment by a certain date or you’ll stop services or turn the account over to collection, follow through.

? Stop services. When your client isn't respecting your credit policy, you may be forced to send a final notice and stop all services. If they ask you to extend terms, request a personal guarantee.

Carefully managing your accounts receivable is a critical part of keeping your business running smoothly. Without care, collection issues can quickly lead to a cash squeeze.

Article post on Forbes - https://www.forbes.com/sites/theyec/2019/07/02/its-time-to-rethink-your-accounts-receivable/#f0c27575bb0b

Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world's most successful entrepreneurs 45 and younger.