7 Accounts Receivable Best Practices for Small Businesses
Erin Baas, Client Advisory Services Director
August 8, 2023
As a small business, you want to ensure that your customers pay you promptly while maintaining a positive relationship with them, which can be a fine line to walk. We’ll discuss seven accounts receivable best practices that can help small businesses streamline their payment processes and improve cash flow.
1. Make it Easy for Customers to Pay You
Simplifying the payment process is key to receiving payments on time. Offer multiple payment options, like credit cards, online payments, and electronic funds transfers. Consider implementing a user-friendly online portal where customers can easily view and settle their invoices and set up payment plan options. You remove potential barriers and encourage prompt payments by providing convenient payment methods.
2. Tighten Your Terms and Timeline
Clearly define your payment terms and communicate them to your customers. Establishing specific due dates and setting shorter payment timelines can help accelerate cash flow. For example, instead of allowing customers 30 days to pay, consider reducing it to 15 or even ten days. Be sure to include these terms on your invoices, contracts, and other relevant documents.
3. Keep an Eye on Your A/R Aging
Regularly monitor your accounts receivable aging report to gain insights into outstanding payments. This report categorizes your invoices based on the number of days they have been outstanding. By reviewing this report regularly, you can identify potential payment issues early on and take appropriate actions to address them.
4. Create a Collections Plan
Develop a systematic collections plan to streamline your efforts in chasing overdue payments. Establish clear steps and timelines for follow-ups, including reminder emails, phone calls, or even a personalized visit if necessary. Remember to maintain professionalism and build strong relationships with your customers while ensuring you are firm about collecting what is owed.
5. Discounts and Finance Charges
To incentivize prompt payment, consider offering discounts to customers who settle their invoices early. Conversely, implementing finance charges for late payments can help offset the costs associated with delayed cash inflows. Be sure to clearly communicate these incentives and charges to your customers so they understand the benefits of paying on time. Notate these items clearly on your estimates, invoices, etc.
6. Know Your Customers
Understanding your customers' payment habits and creditworthiness is crucial for managing your accounts receivable effectively. Before extending credit, conduct a thorough credit check to assess their ability to pay. Continuously monitor their payment history to identify any potential risks. This knowledge will help you make informed decisions about credit limits, payment terms, and the need for any collection efforts. In some instances, it may make sense to ask for payment or a deposit upfront before work is performed.
7. Automate Your Accounting
Leverage accounting software or cloud-based solutions to automate your accounts receivable processes. These tools can help you generate accurate and professional invoices, track payments, send payment reminders, and even integrate with your bank for seamless reconciliation. By automating routine tasks, you can save time, reduce errors, and improve efficiency in managing your accounts receivable.
Accounts receivable management requires consistency and proactive efforts. By prioritizing these best practices, you can stay on top of your finances, minimize the risk of late payments, and pave the way for long-term success in your business. At Lutz, we understand the importance of strong accounts receivable practices and can offer recommendations and help implement processes and procedures. Contact us if you have questions or need assistance getting started.
Erin Baas is a Client Advisory Services Director at Lutz. She began her career in 2002. She provides business accounting and advisory services to a wide variety of industries with a special focus on private physician medical practices and family office administration.
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