Accounts receivable is the money you’ve earned — but not yet received — from your customers. You should do everything you can to cut down the amount of time it takes for your customers to pay up. After all, your business needs cash to run.
Keep track of A/R turnover. When the amount of time it takes to collect payments increases, the strength of your overall accounts receivable decreases. Conversely, a decline in the average turnover is a positive sign for your business. Keep track of this information. Examining it monthly will help you stay up-to-date on your A/R.
Be organized and consistent. It’s important to establish all credit and A/R policies from the very start of your customer relationships. Have an attorney make sure your policies are legal and nondiscriminatory. Keep in mind that running credit checks is standard policy these days, and they should be implemented across the board.
Keep the lines of communication open. Let your customers know how much you appreciate their business — and their timely payments. This simple practice is not only good for business relations, but it also makes reminding customers that a payment is overdue far less awkward.
Some businesses prefer to resend invoices at regular intervals, politely but firmly reminding customers that payment is overdue. They may even offer a minimal discount if payment in full is made within a short period of time or charge a penalty if an invoice is late. If you want to do this, however, these terms must be clearly spelled out on your invoice.
Look into dedicated software. Many software programs will help you generate invoices and monitor client expenses. These can save you precious time. Computerizing your accounts receivable can help you collect payments faster and get a better overall view of where your business stands.
For example, some systems ask you to enter individual credit limits so they can automatically alert you when a customer’s outstanding A/R balance goes beyond a certain point. From there, you can opt to override it. A system like this can be especially helpful with new customers.
Watch your A/R trends. Savvy business owners look regularly at both overall and individual A/R trends. If the overall A/R days of turnover are increasing and you haven’t changed your credit or collection policies it could mean your business is in trouble. However, if only one or two customers aren’t paying you on time, it’s time to contact and them to find out what’s going on.
Exercise caution with new customers. People with unproven payment records can pose a big threat to your business, especially in tough times. Be alert and protect yourself. For example, if a new customer suddenly wants to transfer all their business from a competitor to you, a red flag should go up. They could be financial trouble and may have had their credit frozen by another vendor. Ask all new customers to fill out credit applications and check their references carefully. If a prospect wants to do a large amount of business with you, run a complete business check before taking them on. If they don’t pay on time, it could wreak havoc on your business. You can also require a sizable downpayment on your first order to ensure a new customer’s ability to pay.
The bottom line: An ounce of prevention is the best medicine. Establish solid A/R policies and monitor your A/R at least once a month to keep everything current and manageable. Make sure any outstanding invoices are brought up-to-date before accepting new orders from those clients.
Susan Konig is a freelance writer in New York. She has been writing about finance for 15 years, for publications including Crain’s New York Business, The New York Times, and Registered Representative, a national publication for financial advisors.