A list of assets on a balance sheet might look great, but what feels great is when clients promptly pay your invoices, and you can quickly turn some of those assets into cash.
Seamless accounts receivable processes simplify cash flow management, offering your business the peace of mind to cover your expenses and the flexibility to chase new growth opportunities.
Unfortunately, we all know getting paid on time is not always a simple task, and the problem seems to be getting worse. An Atradius Survey for the USMCA region conducted in 2021 found nearly half (47%) of the total value of B2B credit sales were affected by late payments, and worse still, 6% of invoices went uncollected.
Late accounts receivable payments are a self-perpetuating problem. Receiving late payments creates cash flow challenges for your company, potentially causing late payments to your vendors and creating a chain of delays. A 2019 study by QuickBooks found that cash flow problems caused 32% of small businesses not to pay vendors, back loans, or cover their payroll requirements.
So, what’s the solution? How can you reduce your accounts receivable collection period, ensure prompt payments, and alleviate your cash flow headaches?
Here are six accounts receivable tips to help you get paid quicker and keep the money rolling in on schedule:
#1. Assess Your Accounts Receivable Risk
The first step to improving the situation is understanding it. By assessing your accounts receivables, auditing all your outstanding invoices, and determining the risks present (possible payment timeframe or likelihood of non-payment), you can choose the best step forward for each customer.
Segment your customers into groups to determine risk. This could be based on a range of factors, including:
- Business type
- % of accounts receivable they represent
Record your accounts receivables with an aging report tracking time elapsed for outstanding payments (e.g., 0-30 days, 31-60 days, 61-90 days, and 90 days+). Assess their past payment history and determine if they have recurring issues or an isolated delay. Then adjust your accounts receivable policies for future business based on the risk present for each client.
#2. Formalize Your Accounts Receivable Policies
So how can you formalize your accounts receivable policies to help reduce collection periods?
You need a formal payment policy that encourages on-time payment and disincentivizes late payment. This means clearly establishing payment terms and potentially incorporating:
- Late payment penalties
- Discounts for early payment
- Payment plans
- Multiple payment options (credit card, bank transfer, PayPal, etc.)
- Credit limits
With new accounts receivable policies, you can help ensure customers exhibit appropriate payment behavior with financial incentives and a range of payment options to reduce any barriers to receiving your money.
#3. Be Proactive
Proactivity in accounts receivable comes in a couple of forms.
Before making the sale, you need to have done your homework on the customer and assessed the likelihood of on-time payment. This means checking their credit history and determining their current financial position. The price for your services should also reflect your findings. Any extra work required to chase down payments can quickly eat into profit margins.
Proactivity also means staying on top of late payments. Remind customers when a payment is upcoming and get in touch immediately if they miss a deadline. Clearly explain any late payment penalties and find a way to move forward rather than coming across as antagonistic. The goal is to maintain the client and work towards getting the payment as soon as possible.
#4. Diversify and Don’t Over Rely
Overreliance on a single customer or a single type of customer can leave you with serious cash flow problems.
If one customer dominates your income, one late payment can cause significant problems. Also, if all your customers are alike, you increase the likelihood of multiple late payments coinciding. For example, say you service multiple clients who drive revenue through Facebook advertising. Apple introducing new in-app privacy controls could cause significant cashflow problems for your clients, leading to numerous late payments for you.
The key is having a diversified portfolio of customers such that accounts receivable risk is spread out, not grouped up, and leaving you vulnerable.
#5. Provide Prompt and Accurate Invoices
It can be easy to blame all your accounts receivable woes on your customers and their poor money management. First, however, make sure you aren’t throwing stones inside a glass company, and the invoices you provide are prompt and accurate.
Providing invoices immediately after work is completed increases the chances of a quick payment. In comparison, batching invoices and waiting to send causes unnecessary delays.
Also, it’s 2022. Electronic invoices are much faster than delivering paper copies. Ensure your company and as many clients as possible use accounting systems that facilitate a smooth and speedy digital invoice system.
It may seem obvious, but you should also double-check all invoices contain correct information before sending. Errors slow down the process considerably, requiring invoices to be resent.
#6. Accounts Receivable Automation
Automating accounts receivable processes using dedicated software is an effective way to increase payment speed and reduce the burden on your team. It streamlines the whole operation and can be done in-house or outsourced to reputable service providers.
Whether it’s auto-generating accurate invoices, sending them electronically, processing online payments, or tracking aging accounts receivable, you can stay on top of your outstanding payments with technology on your side. You can even incorporate technology to track clients’ payment history, determine their accounts receivable risk, and suggest future payment terms or credit limits.