We've all had that one friend who borrows money and assures us that he's going to pay as soon as the cash from his car comes through.
Three years later…
While a bad debt is incredibly frustrating in our personal lives, overdue payments in business can be crippling.
These outstanding amounts in business are known as Accounts Receivable. They can quickly get out of hand and impact your financial health if not managed correctly.
Small businesses, especially, need to keep a close eye on their cash flow which depends heavily on how quickly outstanding payments are collected.
Does your accounts receivable process need an overhaul?
Do you have one that works for you?
Chaser's experts have collated the not-so-secret information on what smart companies do to manage their accounts receivables process.
Accounts receivable best practices
Accounts Receivable (AR) are an IOU from your customers or other companies you do business with.
AR indicates that they have received the product or service they needed, and they owe you money for it. We would pay for stuff in an ideal world as we needed it, but this isn't always feasible, especially when dealing with large amounts.
Setting up your systems efficiently and sticking to them will go a long way towards receiving timely payments and building a stable business.
1. Establish good credit practices
Establishing good credit practices upfront will save you a dozen migraine-inducing phone calls to customers who “didn't know” the ins and outs of their payment terms, including who, when or what to pay.
A solid credit application process is the critical first step to having good customer relationships that push your business towards financial stability.
A credit application process serves several purposes:
- It weeds out applicants who are not creditworthy.
- It clearly states the terms and conditions of the payment plan, noting each party's responsibilities and obligations.
- It highlights the individual's interest rate and credit limits.
- It's a legal requirement for everyone who enters into a credit agreement.
Smaller businesses or those just starting may be tempted to offer credit to people or companies that aren't of the highest calibre.
A sale is a sale, after all, right?
Actually, no. A sale is only worth something when the money is in your account and can be used as working capital. Before that, it's simply money that your clients owe; or, in the worst-case scenario, a problem in the wrong accounting column.
So, choose whom you wish to extend credit to carefully, and then ensure that they have all the information that they need for you to manage their account and billing process well.
2. Solid customer database
Your credit application process should link seamlessly with your customer database and populate it with current, accurate records.
Incorrect contact details lead to missing invoices and late customer payments. Incorrect credit limits or erroneous discounts can be tracked and rectified quickly.
Incorrect allocation of payments results in angry customers and embarrassed staff. It'll be your up-to-date customer database that helps to foster good customer relationships, receive consistent payments, and enhance customer satisfaction.
In addition to streamlining your accounts receivable process flow, a robust customer database can be used for effective marketing, product surveys, customer analysis, and so much more.
3. Invoicing customers
Invoicing may sound like a no-brainer, but efficient invoicing is at the root of a good accounting process.
The sooner you send your customer invoices, the sooner you'll get paid. Also, the more accurate and concise your invoices are, the less communication overhead you'll have to endure from confused customers.
Therefore, whether you're sending invoices electronically or in the mail, you must ensure that they are accurate, timely and have all the information the customer needs. Sending a copy of their outstanding invoices for the month along with a statement, details of their purchases if you have them, or any other associated documents does precisely this.
Some businesses use mobile services that can send personalized messages to their customer's phones, offering them the ability to open, browse, and pay from that same device using different payment methods. Whatever you need to do to get that information to your customer – do that. It'll help to avoid overdue payments that impact your cash flow and is key to having an effective accounts receivable process.
Some businesses use mobile services that can send personalized messages to their customer's phones, offering them the ability to open, browse, and pay from that same device.
4. Accurate tracking
Yes, Microsoft Excel is an excellent tool and has helped many businesses through those bleak start-up days. Is your business still using Excel to save and track payments?
If so, you probably want to stop doing that.
Excel is excellent for some basic business processes, but it's a manual process -- and, for complex things such as your accounts receivable processes, an inefficient one. (Unless you're a complete whizz and understand all the tools and formulas available, but even then, there are better tools for effective accounts receivable management.) Errors that impact your accounting team are easily made and difficult to find. Integration into complex systems may not be feasible. Data is not always easy to analyze.
The solution is an automated system that improves your collections procedures.
Bear with us, though; we'll get there shortly.
5. Strategic collection policy
How is a collection policy different from simply invoicing your customer?
Sending invoices immediately is one thing, but what if the due date comes and goes with collecting payments? A collection policy will kick in when your customers aren't paying or when they are paying late. This policy should be highlighted in your credit application to maintain relationships (surprised customers tend to be unhappy customers).
It also needs to be followed carefully.
The point of a collection policy is to prevent late payments, improve your collection efforts, and ultimately resolve these matters amicably.
Perhaps there is a genuine and unexpected reason for late or non-payment that we need to consider. It happens. And wouldn't you rather keep a customer than spend all that money trying to find another one?
In-house collection teams will need a plan for contacting customers with overdue accounts to collect payment.
For instance, they can send two follow-up emails with payment reminders and, failing any action, will make a weekly call to the customer with a respectful yet firm request for payment. After a set period and due warning, the account will be handed over to a collection agency once the final due date comes and goes.
You will decide the tone and process of your collections policy. Whatever it is, though, make sure it adheres to the legal guidelines respecting debt collection.
6. Payment options
You can improve your AR process by offering multiple payment options for faster payments, whenever possible.
There are more payment options available now than ever before, and it's well worth simplifying the payment process for your customers. Plus, anything that simplifies the payment process will also improve your AR process.
Chaser invites you to explore some of these and include them on your website, mobile communication, or emails.
Think of your online activity and which payment processing options you prefer, and why. Your customers will probably enjoy the same elements of speed, safety, or convenience. And that convenience isn't just good for your customers; it can also secure payments, avoid late payments, improve cash flows, and all-around enhance the financial health of your business.
7. Personalized service
Your customer is so much more than an invoice number, and it's important to follow best practices when dealing with your customers.
The person at the end of that email, just like you and I, appreciates good, personalized service.
For example, your communication, including when you send invoices, should include their name, have a friendly tone, and contain all their correct details.
Thanking customers for abiding by the payment terms -- such as sending prompt payment -- is another unnecessary but kind thing to do. The arrangement may be a 'cash for services rendered' situation, but there can still be a human element.
Why not send a message to those who have an excellent payment record and tell them how awesome they are? It takes just a few clicks.
Perhaps throw in a slight discount if you can?
One report highlights the importance of personalized service, saying, “80% of those who classify themselves as frequent shoppers say they only shop with brands who personalize their experience.”
8. Analyze your accounts receivable.
Off the back of the rather cunning plan to automate your Accounts Receivable systems to enhance your accounts receivable management comes another benefit.
Access to accurate and detailed accounts receivable data shows clearly where you are doing well and where adjustments need to be made to your collection process.
Reports from accurate big data allow nothing to fall through the cracks. They will quickly give you the necessary information you need to improve your management system, minimize defaults, stop haemorrhaging capital into bad debts, and tighten up your cash flow. In other words: it's a highly efficient way to improve your AR processes.
This is the perfect example of where knowledge is power.
9. Automate your systems
There's no doubt that manual systems in a growing business are not only less efficient than an automated system but can cost the company dearly in terms of staff time allocation, human error, and excessive overheads.
There's no doubt that manual systems in a growing business are not only less efficient than an automated system but can cost the company dearly...
Just because sales teams and other staff can do a job, it doesn't mean they should. Tedious manual data entry is a mind-numbing and depressing job that can negatively impact your accounts receivable management.
There's no way around it. So why not follow the best practices of leading companies and let the computers do the tedious work, which will help to free up your people to offer more and better customer service?
Don't believe it?
Sage's research shows, “The top reasons why accountants adopt new technology include to increase efficiency (64%), improve the quality of service (44%), and attract new clients (42%).” (Source)
Automating low-value work means the high-value work can get started sooner.
10. Call in the professionals
We live in an age where we don't have to reinvent the wheel.
Managed services, white-label products, open-source software, and strategic partnerships allow the smallest businesses to compete on a global playing field.
If there is a company with knowledge of a system or process that you are battling with, and working with them will improve your receivable management, increase your bottom line, and improve cash flow, why not employ their services?
Expert help that can support your AR team exists. It makes sense to use it.
Taking the headache out of your accounts receivable process
If you're reading this article, then you're likely wondering how you can improve your accounts receivable process and get those outstanding monies in more efficiently.
That's great. It makes you a proactive businessperson and one that we would love to assist.
Here at Chaser, we have made it our mission to ensure that our clients minimize the impact of late payments, get paid faster, enhance cash inflows, and reduce their company debt. Our automated systems save you from chasing your tail when it comes to outstanding accounts receivables.
So far, we've saved our customers over 9 million hours by automating AR tasks. What could you do with all this free time?
What do you have to lose? Try Chaser for free
Accounts receivables best practices: FAQ
Why is correct accounts receivable management key?
Accounts receivable refers to money owed to your business. Having an effective AR process allows AR teams to collect money owed in a timely manner, and to ensure they can follow best practices when chasing late payments. Ultimately, it's good for cash flow and your bottom line -- and that means it's good for your business.
How can you improve accounts receivable processes?
You can improve this aspect of your business by, first, analyzing the extent of the problem; your receivables turnover ratio should outline where you currently stand. If things need to improve, then review your credit policy and ensure your payment terms are clearly outlined to the customer. You can stand on top of this vital aspect of your business by using ERP software, offering discounts for timely payments, and prioritize accounts that have repeatedly made late payments.