Accounts receivable, if not managed effectively, can cause unwanted circumstances in your business. Failure to set proper policies and systems to manage your accounts receivable can potentially lead your business to:
- Poor record-keeping of invoices
- Missing overdue invoices
- Committing errors on bills and invoices
- Writing off receivables as bad debt
And many more.
Why effective accounts receivable management is important
Accounts receivable helps in generating positive cash flow for your business. Delay in payment can result to cash flow shortage. Thus, missing opportunities to put your money into other income-generating assets.
7 Strategies for an Effective Accounts Receivable Management
Define your agreement and terms and conditions clearly
Your payment terms and conditions must be clear to your customers. When transacting with a new customer, you should be able to clarify your policies on late fees and interest terms.
Be cautious when giving long payment terms to your customers. Assess if the terms will not affect time-sensitive business expenses such as your employees’ salary, rent, etc.
Stay consistent with your rules
It can be tempting to bend the rules when a customer relationship is at stake. It is natural for business owners to avoid conflicts with customers. They end up giving customers an extension to payment terms and credits. However, this practice will harm your business in the long run.
There are ways to maintain a good customer relationship while staying firm with your rules:
- Running a credit check before the business deal
- Set credit limits based on your credit check
- Send invoices immediately to avoid delays in payment
- If possible, get a personal guarantee on your agreement
Offer incentives and convenient payment options
Utilise online payment methods so customers have a more convenient payment option. This will also let your business collect payments faster.
On the other hand, offering a discount for early payment can motivate your customers to pay on time. If you are planning to apply this to your payment terms, it is best to speak to a trusted bookkeeper so you’ll understand how it will affect your business.
Build a customer database
Setting up a customer database gives you ease when doing regular monitoring of your accounts receivables. You can easily track due or late payments, and save time when locating a customer’s details. Make sure that the point of contact and their contact information are saved on the database.
Organise your aging report
An A/R aging report is where you list unpaid invoices by date ranges. The benefits of having an aging report are:
- Filtering customers who have huge amounts of credit, due payments, and late payments
- Estimating bad debts and amending allowance for doubtful accounts
- Assessing customer payment behaviours and the effectiveness of your payment collection system
To become more efficient, you may consider automating your aging report along with other bookkeeping procedures.
Automate collections and/or follow-up procedure
Whenever possible, automate your process when collecting receivables or following up on customers with missed payments. This way, you do not have to worry about drafting emails when chasing customer payments. This also lets you improve the overall customer experience in your business.
Consider outsourcing your A/R management
As your business grows, you will have to deal with more responsibilities and decision making. Managing your accounts receivable can be an area in your business that you can outsource so you can spend more time on core functions. Having a trusted person to look after your invoices and keeping your records up-to-date helps you track and collect the money effectively.
Need help with your accounts receivable?
Focus Bookkeeping is here to help!
Call us today for a free discussion with Fabiana Silva, a registered Bookkeeper and BAS agent.