Business owners know that the battle for profitability is won or lost in details. For example, how companies handle accounts receivable affects cash flow, and taking steps to prevent fraud avoids unwelcome surprises. The goal is to keep cash flow strong and stay on top of the receivable/payable ratio. Every company has payment policies, whether written or unwritten. Consider the following to provide as much control as possible over the accounts receivable & accounts payable (AR/AP) process.
1. Understand customers before granting credit
Services or products delivered before the client pays in essence grants credit to the client. The company becomes the ‘bank.’ It doesn’t take long to figure out that not everyone deserves to be granted credit. Consider running credit checks, especially for large orders that represent significant amounts of money. Another option is to ask for a retainer or deposit prior to starting work or shipping the products. This smooths cash flow and reduces credit risk. Third and finally, consider progress billing for longer-duration projects. There’s no sense waiting until the job is done before issuing one big invoice, especially if there are milestones to be met or other natural breaks during the work. Examples include other trades or contractors needing to do their work before a company can resume theirs.
2. Offer multiple payment options
Make it easy on customers by offering multiple payment options. Studies have proven customers pay faster if there is a credit card payment or PayPal option. Apple Pay and Android Pay are relatively recent options to consider adding. For credit cards, MasterCard, Visa, and American Express are universal, but many places also take Discover. For international business, consider JCB (Japan), China UnionPay, and RuPay (India). Merchant fees for credit cards vary by both percentage and type of fees charged. Shop around several merchant providers to make sure to get the plan that’s most cost effective. While some business owners balk at paying credit card fees, it’s a relatively small price to pay for prompt or sometimes immediate payment.
3. Manage the collection process
Once an unpaid invoice reaches the 90-day mark, the chances of collecting are about 50 percent. This means that it’s necessary to have aggressive collection processes in place prior to the 90-day mark. If the invoice is due in 30 days, start at the 35- to 40-day mark with a friendly reminder. At 60 days, the customer needs a strong reminder and perhaps a phone call. At 75 days, they need to know what consequences there will be for not paying. Options include reporting the customer debt to credit agencies or turning the account over to a collection agency.
At 90 days, it’s probably a good idea to make one final collection effort and then turn it over to a collection agency or attorney. It might sound too soon, but the odds of collecting something much older go down significantly as time passes. Create a policy and automate it as much as possible. The main thing is to stay on top of it.
4. Consider positive pay to deter fraud
Positive pay is a service offered by banks that is designed to reduce fraudulent check-cashing against a company’s account. Positive pay usually has an extra charge, but may be beneficial depending on the number of checks a company writes, the industry they operate in, or the size of the checks they write.
To use positive pay, a company sends a file or list of checks to the bank. The bank will not cash those checks against the company’s account unless they match by check number, dollar amount, and account number. The file may also include the date of the check and sometimes the payee. Some banks are also able to match payee, but not all of them, so be sure to ask. If there is a mismatch among checks presented for payment, the check will be treated as an exception item and notify the check-issuing company. A representative of your company will let the bank know whether to pay or exclude the exception check.
Positive pay helps to deter a couple of types of fraud:
- Checks where someone has changed the amount
- Stolen blank check stock
Positive pay is not designed to prevent the type of fraud that occurs when checks are written to a ghost vendor and erroneously approved by management. For internal control, segregate the file creation process from the person who actually writes and/or signs the checks. The main challenge with positive pay is making sure the bank receives the file of checks before they are presented for payment, including any manual checks written. Another issue is the extra cost, although some banks may offer this service at no extra charge on a customer by customer basis.
Please let us know if you need assistance setting up any of the policies or procedures to stay on top of accounts receivable and/or deter fraud.15