The job of accounts receivable is to get money in the door and there are a few steps involved to making sure you get paid.
You need to find customers that pay, bill them correctly, communicate clearly, and lay out enforceable consequences for slow payment.
Here’s your small business guide to accounts receivable management.
1. Don’t do business with just anybody
If you work for businesses, you already know that some are good at paying and some aren’t. It doesn’t have to be a lottery. Do some research before taking them on:
- Run a credit check to find out if they’re regarded as good payers.
- Or call someone else who supplies them, and ask if they get paid on time.
2. Put payment terms in writing (before you start)
Spell out when you’ll be billing your customer, and how much time they’ll have to pay. Point out the consequences of late payment – such as interest, fees or legal action. Get the payment terms signed off before starting work. Don’t leave any room for misunderstandings.
3. Get a personal guarantee
For very large customers only where there is a reliance on payment, ask the owner to sign a personal guarantee. That gives you the option of suing them or the business. Just be aware that some business owners may take exception to this move.
4. Send your invoice quickly
Send your bill straight after the work’s done. It’ll take time for your customer to approve it and pay it, so why not start those wheels turning as soon as you can.
5. Make it easy for customers to pay you
Invoices get paid up to 50% faster when customers are offered convenient payment options like debit card, credit card, services like PayPal, or direct debit by using Xero Apps like GoCardless (https://gocardless.com/xero/)
6. Watch obsessively for payment
Keep a list of all your invoices and check your bank account regularly for payment. Invoices should stay on your watchlist until they’re paid in full. Knowing what has and hasn’t been paid is absolutely critical to managing your accounts receivable.
7. Have a plan for stragglers in your accounts receivable process
Decide what actions you’ll take when invoices go past due:
- When will you email a reminder?
- When will you call?
- Will you send a past due invoice or a statement of accounts?
- When will you involve a debt collector?
An easy way to do this is to fully utilise your accounting package to automate sending invoices/statements/reminders where possible. Xero has a useful video link to assist in adapting for your business https://vimeo.com/139171787.
Learn how to deal with unpaid invoices and write up your own plan of action for overdue accounts. Stick to your policy unless you have a really good reason to be lenient.
8. Make the big calls
Don’t try to handle all your accounts receivable by email. There will be times when you simply have to call. Check they’re happy with the products supplied or work done, let them know they’re overdue, and ask when you can expect payment. Make these types of calls part of your plan for overdue accounts.
9. Make the even bigger calls
Check the payment history of your customers (which should be simple to do on accounting software such as Xero). Are some of them always late paying you? Maybe it’s time for a chat. Ask if they’d prefer another payment method. Or change their payment terms so you’re extending them less credit. You could start asking them for upfront payments, for example. If that doesn’t work, consider letting them go. Picking and choosing good customers is a big part of accounts receivable management.
The number one rule of accounts receivable management
The most important rule is to have some rules. Avoid treating invoices on a case by case basis. A good, consistent accounts receivable process will help keep you in business so make sure you have one.
Come up with a plan that:
- makes new customers aware of their obligations to you
- gets invoices out the door as soon as a job is complete, or billing cycle comes around
- sets out the specific actions you’ll take if an invoice is overdue
Luckily Xero does a lot of this for you (sadly it can’t do the calling) leaving you free
to tackle to day to day running of the business!
Contact us here or call on 01392 495483
Thanks to Xero for their expert tips.