Accounts Receivable: What Small Businesses Need to Know
Is accounts receivable a problem at your business? You’re not alone. Before the pandemic, 62% of small business payments were late.
That number improved to 57% during the pandemic. Late payments impact every aspect of your business. You rely on these payments to make purchasing decisions and pay your own bills.
Would you like to stop this cycle? Read on to learn how to get your accounts receivable under control.
- Accounts Receivable Analysis
An accounts receivable analysis gives you a picture of the overall health of your business. It’s a way to ensure that you are managing your cash flow.
Examine the ratio of accounts receivable to sales. Then look at your customer base of accounts receivable. If you have only one account that has a large amount of money outstanding, it could signify trouble down the road.
It means you’re depending on one client to pay the bills. Diversify your customer base so your business isn’t so vulnerable.
- Build a System for Accounts Receivable
The best collections processes are systematized. Business owners tend not to have an accounts receivable system. They pay attention when cash is really tight or they get around to it.
A good accounts receivable system has specific days when invoicing gets done. Depending on the number of clients, this might be once a week or a couple of days a month.
The key to a solid accounts receivable plan has a follow-up system. Reminders get sent to clients a few days before invoices are due.
They’re sent again a day after a payment is late. There should also be benchmarks to follow up by phone. Then decide what the repercussions are.
Do you withdraw services? Take them to collections? Write it off as bad debt? You may want to have these items in your contract so the client doesn’t get surprised.
As a business owner, you might not want to make collections calls because it might damage the client relationship. You can hand that to a bookkeeping service.
- Watch for Red Flags
Even the best accounts receivable systems have holes. Know the warning signs of accounts receivable and you’ll be able to tell if your system is off track.
Don’t wait too long to follow up. The longer an invoice goes unpaid, your chances of getting paid diminish. It’s always best to follow up within the first 30 days.
A customer that offers partial payments could mean that they’re in financial trouble. It can be understandable during the pandemic.
Getting paid something is better than nothing, so accept the payment, but be firm about the remaining balance. Have an agreement in place that the client can stick to.
If they ignore your calls entirely, it’s a warning sign that they don’t intend to pay the bill. You’ll have to get forceful to get paid.
Restructure Accounts Receivable
The accounts receivable part of your business can’t get overlooked. It’s too important to put on the backburner because late payments affect your ability to pay your vendors and employees.
An accounts receivable system is the key to getting your cash flow under control. Do you want more great tips? Head over to the home page of this site.
