Accounts Receivable

Cash Flow is one of the most cited reasons that small businesses fail. Accounts Receivable is one of the largest contributors to the cash flow problem. Getting a good grip on Accounts Receivable and improving the accounts receivable process should be at the top of your priorities.

Policies around accounts receivables have a large impact on your ability to make sales as well as getting paid for those sales. So we put together a list of 22 creative ways you can improve your accounts receivable. We talked specifically about great ways to improve invoicing already, so this article will focus on improving other parts of Accounts Receivable.

When AR is in rough shape, it is unfortunately common for the customer relationships who you are relying on for the future of your business to be at the top of your late payer’s lists. So you need some of these creative and tactful ways to improve customer payments without ruining those critical relationships.

Accounts Receivable

1. Don’t Have Receivables

Figure out a way to always take payment on delivery of your services.  If you regularly have customers that ask for payment terms, then find an outside lender that will manage this for you.  Lending is not your core business, so don’t take on the headache if you don’t have to.

In many situations, the perceived value of your services is the highest upon delivery.  This is when you as the seller have the most influence over the behavior of your customer.  They are more likely to pay and be happy to pay you when they have some anticipation to motivate the purchase.

2. Have a Credit Check Process

Find a way to ask about the payment reputation of your potential customer.  Is there a friendly trade association that you can ask?  Does your accountant have any experience with them from another customer?  Can you call their accountant and ask about solvency?  Can you ask them for financial reports such as their average Days Payables Outstanding or Accounts Payable balance?

3. Set and Enforce Credit Limit Policies

Credit limit policies can help you ensure you don’t end up extending too much credit to any one company.  It has the benefit of ensuring that your salespeople have the ability to extend credit in specific scenarios which are most likely to pay.  It also helps the sales organization know where not to spend their sales efforts.  Set defined approval thresholds to avoid having senior leaders spend too much time on inconsequential approvals and to shorten the average approval timeline.  Long approval timelines hurt your sales in the end.

4. Have an Approval Process for Discounts

Sales often require discounts, which is OK, but make sure that there are checks and balances.  As with Credit Limits, define thresholds so that approvals are clear, concise and appropriately fast.  This allows a company to set discounts on product lines that can afford to be discounted over product lines that can’t.

5. Get More of the Money up Front

Have a portion of the payment due at the time of the purchase order.  You are WAY better off having that money sooner than later and it will improve you payables timeline.  This can be called a deposit, pre-payment, or retainer.  If a service is already paid for, the customer is less likely to be conservative on how much they use so you may sell more work, in the long run, this way.

You can set a dollar threshold for this or maybe a time threshold.  Make it a policy so you can say “it is company policy to get pre-payment on work that is above $30,000 to cover the cost of inventory.”

6. Invoice Based on Milestones

If you are doing a large scale project find natural milestones that you can identify as an invoice date.  This way you get paid as the project is ongoing, you can identify early if the customer is going to pay, you can slow down work if the customer is late, the customer is paying for value when they receive it, and you reduce your risk of non-payment.

7. Set Contract Terms and Re-State Them on the Invoice

Make sure there is a section in the contract that says what your agreed payment terms are, such as invoicing frequency, payment expectations, payment method, or late payment fees.  This is good practice given the importance of communication.  Handshake deals are very difficult to enforce and get any real remission for.  Any serious business will not have an issue signing a supply contract with you.

8. Negotiate for Shorter Payment Terms

Many companies have set payment terms and use their contract size as leverage to extend contract payment to an extended timeline.  Go into a negotiation knowing that and have a target timeline in mind.  It may be worth negotiating a few other carrots in order to shorten the payment timeline.  Make their purchasing organization advocate for you in their Accounts Payable department.  Just make sure that the concession is conditional on them keeping their payment terms.

9. Bill Accurately and Often

Having a slow and inconsistent billing process is frustrating for your customers and is more prone to errors and under-billing.  It is best to update your invoices on a daily basis for many reasons.  Among them is accuracy, ensuring that items aren’t forgotten, and appropriate revenue recognition.

10. Improve your Invoicing Process

This is a big one, so we wrote a whole blog on 16 great ways to improve your invoicing so you get paid.  The process your business uses to invoice and collect payment can always be improved.  So make sure you have a standardized process that you follow in the first place, and then improve that process as much as you can.

11. Ensure you Recognize Payment Quickly and Accurately

Nothing is worse than calling a customer about a bill only to find out that they already paid but the payment was applied to the wrong invoice.  Make sure you set up systems to recognize payments quickly and accurately on the correct invoices.

12. Prioritize a Healthy Working Relationship

Happy customers are more likely to pay their bills on time and to communicate with you what their plan is for dealing with their commitments to you.  This includes being sure to have constant communication about your business expectations and the actions you will take in their case.  If they are happy and are communicating with you it is easier to make a decision on what to expect from a delinquent asset.

13. Use a Customer Relationship Management System

Customer Relationship Management systems (CRM) can track credit limits, product preferences, payment terms, approved discounts and so much more.  Customer information often times comes through the sales organization, so use this tool to ensure that sales and accounting are communicating effectively.

14. Outsource Your Accounts Receivable to an Accounting Agency

Doing all of this correctly and professionally can take a lot of time.  If you can’t do this professionally yourself, it may be worth paying an accounting agency to help you do this.  An improvement in incoming cash flow can offset a good portion of the cost for doing this.  This also lets someone else be the “bad guy” for you in a sensitive relationship.

15. Make Collection Calls

This is probably up there on the list of a business owner’s least favorite things to do.  But you don’t have to get emotional about this, it is better to be matter of fact.  Give the customer the benefit of a doubt since many times it is an oversight.  Just be matter of fact and remind the customer that the interest charges that you agreed to in the contract are going into effect.  90% of businesses in a UK survey said the regularly had phone calls from suppliers chasing payments.  Some people are just disorganized of have a short-staffed payments department and getting a reminder call is all they need to make payment.

16. Stop Selling Products to Delinquent Accounts

This seems obvious, doesn’t it?  Ensure communication between collections and sales on specific customer accounts are ongoing.  If accounting doesn’t communicate, sales will keep selling.

17. Fire Bad Customers

23% of businesses in a UK survey said they had suppliers who refused to work with them again due to AP process inefficiencies.  Some customers aren’t worth the headache that they cause, and the time spent on them would be better spent on making other customers happier.  Be conscious and logical about which customers you fire and do it tactfully and respectfully.  If someone gets fired as a customer often enough they may change their ways and be worth having as a customer again.

18. Offer to Help Customers Find Financing

This is a touchy one.  It could come across as a backhanded insult, because it sort of is.  Which is why it just might work.  Needing a loan implies that you don’t think they can manage their finances.  This tactic will also let you seem like you really want to help them because it’s so outside of the ordinary.  It’s risky, but might be worth trying before you write them off and sell off the debt.

19. Threaten to Send Customer Accounts to Collections

A call that says you are sending them to collections will really motivate a payer.  The threat carries a lot of weight, but should never come before several documented calls and letters saying the account needs to be paid.  Be sure to do this with a civil and helpful tone.  The process of sending delinquent accounts should be in a published company policy that is disclosed as part of any contract negotiation.  And if you make the threat, be sure to follow through.

20. Hire a Collections Agency or Sell Your Bad Debt

If you have a customer who is WAY late and getting to the point where it just ridiculous, then sell their liability to a collector.  There are some collections agencies that specialize in doing this nicely, and there are others that will not.  You decide if you want to do business with this person again.  In many cases, bad paying customers are not worth having.  If you have a standard process for sending people to collections you can add it to your invoice or contract.

21. Write Off Bad Debt

Writing off bad debt gives you a tax benefit, which is better than nothing.  Be sure you don’t do this too soon.  Many companies already have an allowance for bad debt expense which will dampen the pain of having to do this.

22. Finance your Accounts Receivable

If you can show lenders that you have a successful Accounts Receivable process and turnover rate, you may be able to finance your Accounts Receivable.  This is more important to do when things are going well than when things are not going well.  A bank or lender is much more likely to extend you a line of credit backed by Accounts Receivable if they can see that you are being proactive about it, than when you’re desperate for it.  Being desperate shows a lack of planning.

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