As a small business owner, it’s important that you manage your accounts receivable properly. Not getting the money you are owed on time can lead to cash flow problems that will hurt your ability to pay your vendors, reinvest back into advertising/marketing, scale your business, and even meet payroll.
Tip #1: Start with the Right System
You want to start with a good accounting platform to manage your accounts receivable. Some of the most popular ones include QuickBooks, FreshBooks, Xero, and Wave. While you can also manage your accounts by using the Excel spreadsheets, there are many advantages of using accounting software. The list includes the reduction of errors, more detailed statements, ability to manage multiple revenue streams, the ability to keep track of due dates and outreach attempts, and more.
Whichever accounting software you decide to go with, make sure you set up a system to record payments you are owed on a timely basis, set alerts for when follow-ups need to go out, and review reports regularly. You want to create a clear and easy to follow protocol for whoever will be managing the AR. The last thing you want to do is be reactive and go with the flow. That is a surefire recipe for getting behind.
Tip #2: Create a Follow Up System to Collect Payments
If you want your customers to pay on time, it’s important to create a follow-up system that reminds them about their impending payment. Many of your customers may either think that they have paid already or have forgotten about the payment altogether. All you need to do is set up a set of friendly reminders that their payment is due. You need to start sending reminders early to avoid cash flow problems. Make sure to develop a system internally or use an outsourced receivable management solution.
You might start the first reminders one week after the invoice has been sent and send another follow up a week after that. If the payment still hasn’t been made after the net terms, you need to start sending out mail and call them on the phone. The last thing you want to do is remind customers right before the net term deadline is about to be reached and be stagnant about collecting after the deadline.
Tip #3: Offer Multiple Payment Options and Use Different Terms
The standard net term is 30 days, but there are many creative ways to collect payments faster. The first thing you want to do is to offer multiple payment options. Try accepting online payments via credit cards, direct deposits, and even PayPal. The idea here is to add more convenience to increase the chances of customers paying earlier.
If you’re in need of cash, you can request that payments falling under a specific amount (like under $500) need to be paid immediately. You can let customers know that interest rates or penalty fees will be applied for late payments. You should also try offering more flexible terms by offering installment plans for customers dealing with late payments.
Tip #4: Have a Good Credit Approval Process
Some businesses make the mistake of being loose with their credit practices. They’ll provide credit to customers that clearly don’t qualify to win over their business. They’ll also extend credit to too many customers and have their cash flow tied up until these clients pay them.
You need to have a clear protocol that evaluates which customers qualify for credit and determines how much credit you can provide them with as well as what terms you can offer them. It’s a smart idea to collect a good amount of money upfront and put the rest on credit. You also want to communicate with customers that you can be more flexible with terms and limits as they build a good payment history.
Tip #5: Try Incentivizing Customers for Paying Early
If you’re a small business owner that depends on cash flow to survive, a good way to get customers to pay early is to incentivize them for doing so. Offer them a flat or percentage discount for paying within the first week. You may even set up a tiered system where the amount of money they can save decreases with the increasing time period of paying the invoice.
For example, payment sent within the first week may result in a three percent discount while payment sent within the second week may result in a two percent discount. This can work especially well with customers that are chronically late or customers that are having financial problems. Many of them will pay you first over their other debts to save the extra money.
Tip #6: Communicate in a Professional Manner
It can really be frustrating to deal with a customer that does not respond to your invoice. There are many different problems that the customer may be dealing with so the last thing to do is take out your emotions on the customer. You need to keep your cool and stay professional. You don’t want to hurt your reputation or ruin the relationship you have built.
Try to work with the customer by phone or in person to work out an agreement that works for both parties. Note the problems you’ve had and decrease their credit limits and shorten terms next time. While you can send your unpaid invoices to a collection agency, you should only do so if you cannot come up with a mutual agreement or if it’s become clear that the customer will not pay.
Hopefully, these tips will help make it easier for you to manage your account receivable balances and maintain a healthy cash flow for your business. These are tested real world tips that have been proven to work, so you can expect to see big improvements in your AR process fairly quickly.