10 tips to draft an accounts receivable policy for a small business

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    Credit control & accounts receivables

    10 tips to draft an accounts receivable policy for a small business

    If you’re running a small business but spend every month stressing about your cash flow, then it’s probably time to reassess your accounts receivable policy. With just a few simple adjustments, you’ll be able to develop a more secure process with credit control software that makes your life that much easier. You’re free to focus on your real business goals by taking away the administrative hassle of accounts receivables. Let’s take a look at how you can do this.

    What is an account receivable vs an account payable?

    Just because you have a business doesn’t mean you know everything about accounting. That’s okay! It’s a learning curve and we’re here to teach. Simply put, accounts receivable and accounts payable are related. (Here’s a resource for some light reading when you’re ready; Accounts Receivable Meanings and Definitions for New Business Owners)

    • Accounts receivable is considered a business asset because this is money that your clients owe you. When payment is received from your clients, cash is debited and accounts receivable are credited on the balance sheet.
    • Accounts payable is a liability in that it is the money that you owe to your suppliers. As a liability account, accounts payable will have a credit balance. Any credit entry will increase the balance in accounts payable and a debit entry will decrease the balance.

    What are accounts receivable examples?

    Many businesses will operate using accounts receivables. Some examples of these include:

    • A plumber repairs a leak at a client’s house for £120 and issues an invoice for the outstanding amount. This will be recorded by the plumber as accounts receivable until the amount is paid in full.
    • An electricity bill of £250 is issued at month-end. This outstanding amount will be recorded by the utility company as an account receivable until paid.
    • …you get the idea!

    Tips for drafting an accounts receivable policy

    The concept is really quite simple, but if you don’t keep on top of your accounts receivable, your cash flow – and business operations – will come to a grinding halt. Here are a few tips for drafting an effective policy that will revolutionise your small business.

    1. Create an ageing report

    The first step in implementing a new accounts receivable policy is to understand what’s owed right now. Do a thorough assessment of your current collections by creating an accounts receivable ageing report. This will include the number of days since the invoice was issued, and the amounts due. Keep this updated on a weekly basis.

    - Accounts receivable turnover (ART) ratio

    You can use the following formula to determine how often your accounts receivable collection takes place. The formula is:

    If you have an ART of 10, your average account receivable was collected in 36.5 days. This will assist in creating an ageing report much faster.

    2. Get a larger client base

    Although this is not strictly limited to accounts receivable, getting a larger client base will help with cash flow and improve the running of your business. It’s great to land a big corporate, but their payment terms can extend up to 120 days, which means you’ll need smaller clients to keep up with payments.

    3. Know your customer

    We don’t expect you to have a weekly cup of coffee and go on family holidays with our clients, but you need to do a bit of a credit check to ensure your customer is reliable. Do some research to ensure they’re a registered entity with a good track record.

    4. Develop clear procedures

    It’s important to actually outline a procedure for your accounts receivable management – and to follow this procedure without fail. What is the payment period and structure? How do you handle invoicing, late payments and customer data management? By putting the correct steps into place, and following through on them, you should see faster payments month-to-month. Below we will touch on some of the procedures you should consider implementing.

    5. Send clear invoices promptly

    Don’t take your time when invoicing or it sets the tone for the customer that delays are acceptable. By sending out your invoices promptly, you’re letting your customers know what you require from them. Make sure to clarify, within your invoice, the payment period so that there is no confusion. The simpler, more direct the invoice, the better. Even if this is a regular customer, just alert them to the fact that you’re implementing a new system and delays won’t be tolerated.

    6. Make payment systems easier

    The more convenient you make the payment options for your clients, the more likely you are to get paid. It’s really that simple. Electronic payment portals are great as they let your customers pay with credit or debit cards through a mobile app. If it suits your business model to set up recurring payments, this can also be done through payment portals.

    7. Implement a discount policy

    Where feasible, offering clients a discounted rate for prompter payments – or even for payments made ahead of time – is a great incentive and a way to get on top of your accounts receivable. In tough economic times, where every cent counts, this is a great option to consider.

    8. Track overdue invoices

    Managing your accounts receivable means following up on any overdue invoices as soon as the time is up. Included in your procedure should be how you track invoices and when. You can choose to set up an SMS or email system, but remember that it must be polite but firm. It could also provide your client with payment options to ensure payment is made, even if not all at once.

    9. Consider payment plans

    Often a client might be having cash flow challenges – possibly as a result of poor accounts receivable management! You can assist them by implementing a payment plan to assist in securing your outstanding amount. This is a great way to show customer support and instil customer loyalty. Make sure the payment plan is provided in writing and signed by both parties.

    10. Outsource accounts receivable

    Even a small business can suffer great losses when accounts receivable isn’t implemented properly, and often it’s a case of needing to outsource the process to a third party. By working with a reputable agency like Chaser, you are provided with a ‘buffer’ that chases up your outstanding amounts in a professional and timely manner. The benefits of outsourcing debt collection to Chaser include:

    • Reducing costs: rather than using an in-house credit controller or wasting valuable time on accounts receivable policies yourself, you’re saving costs by benefitting from financial expertise.
    • Reducing debtor days: by leveraging debt collection policies that work, Chaser ensures you’ll be reducing debtor days and improving cash flow quickly.
    • Avoid bad debt: through these effective policies that actively monitor your customers, you avoid the risk of bad debt.
    • Customer experience: Chaser’s friendly and professional team take a customer-first approach that maintains great working relations.
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    Take the hassle out of your day-to-day business by getting in touch with Chaser today. With accounts receivable designated to the Chaser team, you’re able to allocate your focus to more business-enhancing activities while enjoying the benefits of uninterrupted cash flow and a satisfied customer base.

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