Managing cash flow properly is essential for any company or organization, and one common cause of business cash flow issues is poor management of accounts receivable. These days, too many business owners make the mistake of assuming that because a customer has bought a product or service from them, he or she will automatically pay for it. Unfortunately, an increasing number of retailers are discovering there are many customers who fail to pay in a timely manner, and often some who fail to pay at all. Slow payments will often cause business owners to have to use their cash reserves or increase their financing. An additional problem is that as unpaid accounts age, the chances of collecting the debts continues to diminish. The more cash a company ties up in receivables, the less is available to run the business. Therefore, a good understanding of accounts receivable management best practices is essential to successfully running any business.
Taking Steps to Deal with Debt
Here are 10 of the top accounts receivable management best practices to put in place for your business so you can limit bad debt.
- E-mailing invoices rather than mailing them – customers often claim they have failed to receive an invoice if it is sent by regular mail. E-mailing ensures you have proof of sending.
- Shorter payment terms – when paper checks and invoices were common, businesses often extended credit to their customers to allow for delays in the mail. However, these days, as Internet payments and e-mails are more commonplace, adopting a “payment due on receipt” strategy is a better option.
- Offering a variety of payment methods – by offering online payment portals that accept a variety of payment options via several channels, companies stand the best chance of receiving payment on time. Online portals are open 24/7 and offer a convenient option for all customers.
- Establishing a credit policy – for any company that is considering extending credit to its customers, performing a credit check is certainly worthwhile to assess the customer’s ability to pay.
- Regular review of accounts receivables – it is vital to track the aging of accounts receivables and follow up on all overdue accounts systematically after a certain number of days. Accounts receivable management best practices determine a report should be run every week to identify overdue accounts, and, especially, those older than 20 or 30 days.
- Follow up any unpaid invoice with a telephone call if a payment hasn’t been received after a certain time. E-mails and letters aren’t very effective since the customer is not actively engaged. Speaking directly to the customer is the best way to maintain a positive customer relationship and resolve the payment problem as quickly as possible.
- Maintain a record of collections – a log must be kept of any overdue account, including times and dates of all e-mails and phone calls and the customer’s response.
- Offering discounts for making payments early – customers are more likely to make an early payment to a company that offers them a discount for doing so.
- Using a factoring service – factoring services can improve your cash flow greatly, especially for companies with long collection cycles.
- Using a collections agency – companies that find they cannot collect their debts, even when they have followed all the above methods, should submit the overdue account to a collections agency. Although customers are unlikely to return after being pursued by a debt-collection firm, they are not the sort of customers you need anyway.
Improving Cash Flow, and Revenue by Adopting Best Practice
While many customers are likely to pay their bills on time, every company will experience overdue accounts from time to time. By following the above accounts receivable management best practices, you can minimize your business’ collection problems.