In 2018, CB Insights released the results of a survey regarding startup failures. Of the 101 failed startups surveyed, 29% named “Ran Out of Cash” as a top reason why their business collapsed. Depleting your financial reserves can absolutely devastate your business – regardless of size or age.
Accounts receivable, also known as “receivables” or “AR”, are amounts owed to a company by their customers for delivering goods or services. Receivables are classified as high-ranking business assets. They have value and can be converted into cash once paid. Thus, failure to collect AR in a timely manner can lead to a plethora of financial woes for your business. Not only is this frustrating, but having poor cash flow and/or the inability to pay bills is extremely dangerous as well.
Therefore, it is vital to know how to efficiently and effectively collect on AR and follow up with customers with overdue accounts. We offer seven strategies to help your business stay ahead of the game.
1. Invoice Quickly
The most optimal time to deliver an invoice is immediately upon the completion of the job. Do not feel awkward or greedy sending your invoices ASAP. A prompt invoice is a reminder that you are not doing the work for free, while also presenting your business as professional and organized. Representing your company as functional, diligent and efficient can also attract repeat customers.
Issues quickly develop from an untimely invoice. Often, these problems are completely avoidable. On one hand, a delayed invoice indicates an indifference to being paid. Inherently, this attitude can inhibit your cash flow for no reason. On the other hand, waiting to prepare invoices at the end of the month, for example, may add as many as 30 extra days to your cash flow conversion period.
2. Deliver Clear, Easy-to-Understand Invoices
Customers prefer invoices that are clear, accurate and easy to understand. Whether you send one invoice or multiple over the course of a project, the clearer your invoices are, the more likely your customers will be to pay them on time and correctly. Distributing invoices that are sloppy, incoherent or vague will slow down the payment process considerably. Incomprehensible invoices result in customers contacting you to clarify – slowing the process down – or leads to incorrect payments – which, again, slows down the process.
In order to ensure clarity in your invoices you should:
- Itemize the goods or services provided to your client.
- Provide a clear description of the goods/services and when you performed them.
- Include the total charge for all services at the bottom of the invoice. *Be sure to include relevant taxes and other fees in the total. List and explain any additional fees or taxes on each invoice.
- Include relevant payment information, such as your vendor number if your client assigned you one.
- Include your employer identification number or federal tax ID, as well as contact information.
Also make an effort to utilize plain language on your invoices. For instance, rather than including “Net-30” at the end of the bill, write “payment is due within 30 days.” You can also simply write the exact due date to avoid any confusion.
3. Simplify the Payment Process
Quite frankly, the easier it is for customers to pay you, the quicker they will do it. Instituting a payment process that involves multiple restrictions or requirements is likely to make the client feel frustrated. In turn, they may put off paying your company and/or reconsider working with you in the future.
One method of simplifying the payment process is to accept multiple forms of payment. Different forms of payment include: checks, credit cards, Automated Clearing House (ACH) or even via text message. It is also worth it to offer alternative methods such as Venmo or PayPal. In fact, many small businesses or freelancers accept payments via PayPal so being able to pay your company with funds already in their accounts might be appreciated.
Again, the more options your customer has, the easier it is to pay you promptly.
4. Incentivize Timely Payments
It is in your best interest to quicken the collection of accounts receivable. However, it is also often in your customer’s best interest to delay their accounts payable for as long as possible to manage cash flow. Therefore, it is wise to present your client with an incentive to pay early and/or on time.
Two methods of doing so are:
- Offer a small discount to clients who pay their invoices early. For example, if they pay within 10 or 15 days of receipt, they get a 2% discount.
- Add late fees. Late fees may not encourage early payments, but they do discourage late ones. For instance, you may be inclined to institute a 2% late fee if the invoice is not received within 15 after the due date. You can add additional increases as more time passes.
5. Establish Good Relationships with Your Clients
Taking the time to get to know and understand your clients can pay off – literally. Developing excellent relationships with clients not only encourages timely and consistent payment, but can also lead to even greater rewards as well.
Beyond being polite, treating them as your number one client and paying attention to the little details about your customer, it is helpful to understand what is going on in your client’s industry. Being up to speed on where your client is at in their business timeline or taking note of the ebbs and flows of their industry not only demonstrates exceptional customer service, but can also help you pitch your ideas, develop payment plans or more.
For example, some customers have a legitimate reason as to why they are unable to pay their invoices on time. They may want to pay you on time, but are having temporary cash flow issues. In these instances, if you take the time to understand the situation, you can come up with a payment plan. This helps you get paid and keeps your client on track, while also demonstrating that you are willing to work with them in these instances. If you do draw up a payment plan, it is critical to get the agreement in writing and signed by both parties.
6. Develop an A/R Aging Report
Accounts receivable aging, sometimes referred to as an accounts receivable reconciliation, is the process of categorizing all of the amounts owed by all of your customers, including the length of time the amounts have been outstanding and unpaid. At a glance, an aging report informs you of the current payment status of your customers and how much is owed. Typically, the report lists invoices in 30-day increments:
- Left-most column contains all invoices that are 30 days old or less.
- Next column contains invoices that are 31-60 days old.
- Next column contains invoices 61-90 days old.
- Final column contains all invoices older than 90 days.
Often, the longer a debt is owed, the less likely it becomes that you are able to collect it. Thus, knowing about your customers and who has debts is critical for collecting payments. You are better able to focus your collection efforts if you are aware of who is behind on their invoices and by how much.
Click here for examples of an aging AR report.
7. Establish a Plan for Clients who Miss Payments
Customers will miss payments. For some it is a one-time deal during a rough patch, but for others missing payment deadlines seems to be the norm. Therefore, it is important to have a plan in place for late-paying clients. For example, a good first collection step is often a friendly reminder call or email from your designated bookkeeping employee. This phone call can simply be to “touch base.” It is beneficial to treat it as a friendly call, as they may have simply forgotten to make the payment.
If phone call or email reminders are ineffective, the next step may be sending a collection letter that directly states the bill is overdue and requires immediate attention. This action reflects increased concern and seriousness. Also, sending the letter via email automatically creates a copy for your files, as well as automates a time stamp on the request.
Finally, when you have done all that you can and have yielded no results, you can turn to a collection agency. Collection agencies collect debts for a fee or percentage of the total amount owed. However, agencies bring knowledge and experience that individual business owners do not have. Thus, hiring an agency can be well worth the fee if the number of outstanding accounts receivable warrants it. Please keep in mind, hiring a collection agency is an extremely serious step that may adversely affect your relationship with the client.
Being Proactive is the Best Course of Action
Ultimately, implementing proactive policies and procedures is the most effective way to ensure you are being paid for the products and services you sell. By providing clear and prompt invoices, having plans in place for delinquent payments and following the other suggested tips, you can improve your AR collections. With improved collections comes boosted cash flow and an elevated bottom line.
If you need any additional ideas or tips on how you can speed up your AR collection process, contact us today. We are happy to help!
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.