By Joseph Muscente
As a small business owner, getting paid on time is a big deal. It keeps your operations running smoothly and ensures you’re not scrambling to pay employees and cover other expenses. That’s where accounts receivable collections come in—it’s all about collecting the money customers owe you.
While collecting outstanding invoices might sound straightforward, you know getting customers to pay is not always so simple. There’s an art to getting it done efficiently and getting paid on time.
In this article, we’ll break down some tried-and-true strategies to help you speed up collections and make the process a breeze.
Accounts receivable collections: Understanding the basics
Let’s start with the basics. What are accounts receivable collections, anyway?
Imagine you sell a product to a customer, and they promise to pay you later. In accrual accounting, that promise gets recorded on your books as an “account receivable,” also known as an A/R. Ensuring customers make good on their promises and pay what they owe is accounts receivable collections.
So why are accounts receivable collections important? Think of it this way: you’re in business (at least partially) to make money, right? If your accounts receivable process is inefficient or ineffective, getting paid promptly for your work is tough. And without that cash, paying bills, covering expenses, and even paying yourself and reinvesting in the business can be challenging.
Efficient and effective accounts receivable collection processes also help you provide a positive customer experience. Late invoices, mismatched payments, and misunderstandings around billing can strain customer relationships, which is something every business owner wants to avoid. So, in a nutshell, a streamlined A/R collection process is essential to your business's overall health and growth.
Tips to improve the accounts receivable collections process
Ensuring you get paid on time requires a mix of proactive steps and responsible strategies. Here are some best practices to help you improve your A/R collections.
Set clear payment terms
Before extending credit to customers, ensure you’re upfront about your payment expectations. Whether you allow customers 15, 30, or 45 days to pay invoices, transparency reduces ambiguity and sets the right expectations.
Send accurate and timely invoices
First things first: send your invoices as soon as you deliver the product or service. If you don’t send an invoice, your customers can’t pay. Also, make sure your invoices are easy to understand. This includes clearly itemized charges, a defined due date, and details about payment options. A well-structured invoice minimizes questions and disputes and paves the way for prompt payment.
Offer early payment incentives
Consider offering discounts for customers who pay their invoices early. Offering a 2% discount for payment within 10 days might cost a small amount of revenue, but getting cash faster often outweighs it.
Follow up regularly
Don’t be shy about sending reminders. Consider taking a tiered approach: a gentle reminder a couple of days ahead of the payment deadline, an email as soon as the invoice is past due, and a more assertive phone call for longer overdue accounts.
Offer multiple payment options
The easier you make it for customers to pay, the more likely they will do it promptly. Consider accepting credit cards, checks, electronic funds transfers, and even third-party payment platforms like PayPal or Stripe to make payments convenient for your customers.
Consider late fees or interest
Consider charging interest or late fees on seriously past-due invoices. You might charge a flat fee or a percentage of the outstanding balance.
Before you can charge a late fee, you must have a late payment policy. So develop a payment policy that tells customers what action you will take if they don’t pay invoices on time. Also, some states restrict how much you can charge in late payment fees, so check with your attorney when drafting your policy.
Tackling common challenges in the accounts receivable collection process
Even with the best strategies in place, challenges in collecting accounts receivable are bound to come up. However, you can overcome these challenges with a little foresight and some clever tactics. Let’s look at some common challenges and how to navigate them.
Disputed invoices
Customers might contest an invoice due to discrepancies in the amount, services, or products listed. To avoid disputed invoices, regularly review and update your invoicing processes. When a dispute arises, address it promptly and professionally. Also, having a detailed record of transactions and customer communications can be invaluable here.
Chronically late payments
Some customers consistently pay invoices late, no matter how well you manage your receivables or how proactive you are about sending a gentle reminder. While anyone might overlook a deadline here or there, it might be worth revisiting your credit terms for repeat offenders.
For customers who are constantly late, change your policy to require full payment upfront and don’t deliver products or begin the service until you receive payment. That can be a scary step if you fear you’ll lose business, but it typically only deters the kind of clients who cause you stress and force you to waste your time and money chasing them down.
Cash-flow crunches
Even when slow-paying clients aren’t an issue, you might face a cash-flow crunch—times when a cash shortage makes it tough to cover your immediate financial needs. To prepare for these inevitable lean periods, it helps to have a backup plan. A business line of credit or invoice factoring can help you pull through.
Accounts receivable collections FAQs
Managing accounts receivable collections can be complicated. Here are answers to a few frequently asked questions to help you understand the issues and streamline your processes.
What are accounts receivable collections?
Accounts receivable refers to the practice of identifying and collecting unresolved payments from customers for provided goods or services.
How do you effectively collect accounts receivable?
There are numerous factors that contribute to an effective collection of accounts receivable. These include establishing clear payment terms, sending timely invoices, and following up regularly. Being proactive is crucial to effective collection as well.
Is it a good idea to outsource accounts receivable collections?
It depends on the size of your business, your expertise in handling collections, and the volume of outstanding receivables you’re dealing with. Outsourcing can free up internal resources and might offer more specialized expertise, but it’s crucial to choose a reputable agency so you know they’ll treat your customers with respect and not damage the relationship.
How should I handle a client who refuses to pay?
Start by ensuring there isn’t a dispute over the product, service, or amount of your invoice. If your client is unhappy with the product or service they received, consider what you can do to make the situation right. If the client is happy with your product or service but has cash flow issues of their own, consider setting up a payment plan. Consider legal action or hiring a third-party collection agency as a last resort.
About the Author
Post by: Joseph Muscente
Joseph Muscente is an analyst at LendingTree and works on the content marketing team where he empowers others to make well-informed financial decisions. He recently earned his B.A. in public relations from Penn State University.
Company: LendingTree
Website:
www.lendingtree.com
