Managing accounts receivable (AR) effectively is essential for fostering financial stability in your business. In contrast, poor AR management can hinder growth, increase costs, damage customer relations, cause your existing capital to go to waste, and more.
For business owners, this is no small concern. In fact, on average, U.S. businesses have 24% of monthly revenue tied up in accounts receivable, to the tune of some $3 trillion total. That means two things: AR is of paramount concern…and there is significant room for improvement.
Even an accounts receivable process that is just okay instead of optimized can weaken your business’s financial position, lead to missed opportunities, and dry up your cash flow. So if your AR management is barely scraping by, the time to take action is now.
In this post, we’ll delve into ten practical tips to help you fortify your business’s financial health, minimize late payments, and build lasting customer relationships.
Accounts receivable represents the outstanding payments owed to your company by customers who have purchased on credit and is a vital component of your business’s financial structure. As such, efficient management of AR is crucial for maintaining smooth business operations and ensuring financial stability.
Effective AR management is pivotal in optimizing revenue, maintaining a healthy cash flow, and fostering strong customer relationships.
These short-term liabilities are recorded as current assets on your balance sheet, reflecting the money expected to be collected in the near future—so timely payments from customers are essential for a steady cash flow, allowing you to cover operational expenses and invest in business growth. You can build customer trust and loyalty by implementing clear payment terms and establishing consistent communication channels. This fosters positive relationships and encourages repeat business, leading to long-term partnerships and increased profitability.
Furthermore, efficient AR management minimizes the negative consequences of unpaid invoices. It helps you avoid cash flow gaps, late payment penalties, and the need for costly debt collection efforts.
By promptly collecting payments and reducing the average collection period, you can improve your cash flow position and allocate resources more effectively. This allows you to reinvest in your business, pursue growth opportunities, and enhance overall financial stability.
Good accounts receivable management involves implementing various processes and strategies, but here are some essential tips to ensure your AR is as efficient and effective as possible.
Before extending credit to customers, conducting a thorough credit check is crucial. This process helps determine a client’s creditworthiness and minimizes the risk of extending credit to customers who cannot pay on time. Evaluating credit history, financial stability, and payment patterns can provide valuable insights into a customer’s ability to meet payment obligations.
Setting clear payment terms is another crucial step. Ensure that the payment terms, such as due dates and late payment penalties, are clearly outlined in your agreement with the customer. This clarity helps avoid any confusion and promotes prompt payment. By clearly defining expectations, you can minimize disputes and delays in receiving payments.
A robust and efficient billing process is the backbone of effective AR management. This includes:
Doing all this helps customers recognize their obligations and lets them plan their payments accordingly.
Make it easy for your customers to pay by offering multiple payment options. These include online payments, checks, credit/debit card payments, or electronic transfers. The easier it is for customers to pay, the quicker you’ll receive your money. Consider integrating electronic payment systems and providing a secure online portal for customers to make payments conveniently. By diversifying payment options, you cater to varying customer preferences and encourage prompt payments.
Leveraging technology can significantly enhance your AR management. Automated systems can send timely invoices, track payments, flag overdue accounts, and generate insightful reports. This not only improves efficiency but also reduces the chances of errors. Implementing an accounting software or a dedicated AR management system allows for seamless tracking and monitoring of receivables, streamlining your invoicing and payment processes. Automation ensures consistent and accurate record-keeping, reduces manual effort, and provides real-time visibility into your AR status.
Tracking key performance indicators (KPIs) such as Days Sales Outstanding (DSO), Average Days Delinquent (ADD), and Collection Effectiveness Index (CEI) can provide valuable insights into your AR performance. Regularly reviewing these metrics can help you identify bottlenecks and optimize your AR processes. By monitoring the time it takes to collect payments, identifying trends, and comparing results against industry benchmarks, you can proactively address issues, implement improvements, and forecast your cash flow more accurately.
A proactive collection strategy involves:
Remember, the longer an invoice remains unpaid, the harder it becomes to collect the amount due. Implement a systematic process for following up with customers as soon as a payment is past due. Send friendly reminders, escalate the communication if necessary, and be prepared to take appropriate steps, such as issuing late payment notices or engaging a collection agency, to recover outstanding amounts.
Consider offering early payment incentives, such as discounts, to encourage prompt payment. This not only motivates customers to pay sooner but can also foster positive customer relationships. Communicate these incentives upfront, highlighting the benefits of early settlement. The prospect of saving money or receiving additional perks can provide customers with an extra incentive to prioritize their payments, resulting in improved cash flow and strengthened customer loyalty.
Keeping accurate and up-to-date customer data is critical. This includes the customer’s contact details, credit history, payment preferences, and specific billing instructions. Accurate data can streamline the invoicing process and facilitate effective communication with customers. Regularly review and update customer information to ensure that invoices reach the correct contacts and that payment reminders are sent to the appropriate individuals. Additionally, maintain comprehensive records of all customer interactions, including communication, payment agreements, and disputes, to resolve issues promptly and maintain strong customer relationships.
If managing AR becomes overwhelming, consider seeking help from professionals. Outsourcing your AR management to a reputable agency can free up your time to focus on other aspects of your business while ensuring that your receivables are handled expertly. Professional AR management services have the expertise, systems, and resources to track, monitor, and collect outstanding payments efficiently. They can provide dedicated support in maintaining accurate records, implementing effective collection strategies, and resolving disputes. Outsourcing can be a cost-effective solution, particularly for small businesses that may need more resources or staff to manage AR internally.
While managing accounts receivable can be complex, it is an integral element of your business’s financial health.
You can ensure effective AR management and a robust cash flow by implementing thoughtful strategies, leveraging automation, and maintaining clear communication with customers. Remember, the goal is not just to get paid but to build lasting, profitable relationships with your customers.
Prioritizing accounts receivable management empowers you to strengthen your business’s financial health and position it for long-term success.
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Above & Beyond
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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