Smaller firms need effective accounts receivable (A/R) processes even when they lack the financial resources or flexibility of bigger ones. Also, small businesses should focus more on how they collect their outstanding debts, which helps them complete their day-to-day transactions.
Accountants and small business owners must understand how accounts receivable operate to have good cash flow, receive client payments faster, and make wiser business decisions.
If you are a small business owner seeking a guide on how maintaining good accounts receivable can help you grow your company, the article below addresses exactly that.
What is Accounts Receivable?
When a company expects to receive consumer payment for products or services it has sold, this amount is known as “accounts receivable” in accounting. All firms report it as an asset, often representing the total amount of unpaid invoices.
It focuses on the parts of your company’s financial statements that deal with debts owed to the company, such as:
- The general ledger
- Company balance sheet and
- Any related records, procedures, and activities
Usually, these legally required funds represent payments your consumers owe you for purchases made on credit. Accounts receivable can be a reliable indicator of your company’s income or profitability.
Accounts receivable vs. Accounts payable
Accounts payable and accounts receivable (A/P) are complementary concepts. Accounts receivable focus on what consumers owe your company for purchases made, whereas accounts payable focus on what your company owes its suppliers and vendors for purchases made by you.
What is the Importance of Tracking Accounts Receivable?
Small businesses must track receivables to collect payments and avoid cash flow problems. Here are some reasons to manage your accounts receivable:
1. Efficient payment collection
Managing accounts receivable will help you ensure you get all the money your clients owe you. Without it, you risk losing money by giving away your product for free, which will affect your profit.
The majority of your business’s income comes from paid invoices. For smaller companies, in particular, problems like delays or errors affecting these payments can have a big negative effect on your overall income and cash flow.
Get your money back appropriately by following an accounts receivable process. It is important to consider the following points while creating it:
- Set up clear payment terms. Invoices and other payment documents should explicitly express this information and provide written confirmation to the client. It should include the following:
- Payment due date
- Payment method
- Penalties for late payments.
- Payment due date
- You can offer incentives like discounts or loyalty perks to motivate clients to pay on time. This might be a great way to get paid, especially if the consumer is unwilling to pay.
- Companies having trouble collecting payments may want to look into accounts receivable automation software. This type of software excels at chasing down overdue payments.
- You can send reminders to customers who haven’t paid on time. This is a good way to collect what they owe.
- You can make phone calls to customers who are late on their payments. Be professional and polite but firm about needing the payment.
2. Grasp your short-term cash flow
A company should have a steady cash flow to meet its expenses and seek growth opportunities. Understanding your company’s short-term cash flow will help you manage its finances more effectively. An important part of a company is its capacity to generate cash quickly, which can be achieved through a proper accounts receivable process.
Track your company’s accounts receivable process to control your short-term cash flow. Creating a regular system for tracking and collecting payments is a good idea to ensure your funds are secure and can handle all your bills.
3. Prevents cash flow shortages
Problems with cash flow are the most common reason companies cannot finance anticipated investments. During these periods, they will be unable to cover their operational expenses. Improper management of accounts receivable software tends to cause shortages like these.
When a business spends more money than it brings in, it’s called a cash flow shortage. This may happen if the management of accounts receivable needs to be improved. For instance, a cash flow constraint could occur if your clients pay their invoices late, significantly delaying the cash flow into your firm.
Conversely, you can keep your bills paid on time and your company’s cash flow steady by monitoring your accounts receivable procedure and frequently following up with late-paying clients.
4. You will Understand when to Follow Up
Checking and following up on receivables makes it easier to spot overdue payments. Sometimes, a little nudge is all it takes to get someone to pay you back. You must take steps if they must pay when it is due.
The due date, the customer’s payment history, and their communication choices are some factors that ultimately decide when you follow up with a customer. If you keep these things in mind and communicate with clients appropriately and promptly, you can help ensure that your accounts receivable process is well-managed and that you can collect payment from clients on schedule.
5. Identify the customers who are difficult to deal with.
You should run reports often to know who is behind on their payments. This way, you can focus on cultivating connections with reliable clients in terms of payment and won’t disrupt your cash flow.
You must keep track of your receivables to make data-driven decisions based on a solid grasp of your company’s financial status.
Identifying challenging customers in the accounts receivable process can be tough, but you can do this using advanced software that can help. To reduce associated risks, you can get insights into customer behavior, such as payment history, credit score, and communication habits.
The ability to verify creditworthiness is an additional criterion of A/R management. The likelihood of payment default increases when a customer’s low credit score indicates a history of financial problems. Credit ratings allow you to make informed decisions on credit issuance and its associated conditions.
What are the Challenges in Managing Accounts Receivable?
There will always be issues, regardless of how thorough your accounting platform is or how carefully you plan. Handling any concerns that may arise swiftly is important to prevent payment delays or fallout.
Here are some potential challenges and ways to overcome them:
- Overlooked Reminders: The best way to prioritize consistently sending payment reminders is to adopt necessary technologies or assign specific workers. Your debt collection efforts can make all the difference in collecting your outstanding debts.
- Billing Errors: Everyone hates it when their bill has an error. However, using automated software instead of human workers will make your invoicing and accounts receivable processes more accurate and dependable.
- Uncollectible Debt: When you give someone credit, there’s always a danger they won’t pay you back. On the other hand, by looking into their finances and credit history, you can avoid providing credits to clients who might be cash-strapped or have a poor credit history.
Tips to help you manage accounts receivable
To avoid all these challenges and establish a proper process in place, consider the following tips:
- Always communicate clearly with your customers. Poor communication is the major cause of unpaid invoices within the first 60 days of delivering your products or services.
- Have a solid accounts receivable process. Choose a day to create, print, and send invoices and another day to send aged account receivable reports and contact the respective customers.
- Many businesses find that calling the client to confirm receipt is the most effective course of action a week after issuing an invoice. You can showcase your excellent customer service by asking for feedback on the product you provided and inquiring briefly about the invoice’s receipt.
Master your Account Receivable for your business’s success:
To simplify your account receivable process, consider partnering with companies that can automate it, thus avoiding manual errors. With their support, you can have an integrated payment portal that makes sending, processing, and closing invoices easier.
By automating the account receivable process, you can focus on other aspects of your business, ensuring the company’s development. Since account receivables are an important part of your small business’s growth, you can get support from these companies to avoid any possible human mistakes.
