Anytime a businesses performs a service or ships a product before getting paid, an Account Receivable is created. If customers pay before their invoice is past-due, all is right with the world. If they don’t, collections slow and the cash flow cycle is constrained. Here are some tips, preventive and supportive, to help keep accounts receivable current.
- Be Thoughtful about Granting Credit
If a business delivers service or a product before a client pays, the business is in effect serving as the client’s “bank,” granting the client credit. Not everyone deserves to be granted credit. Consider running credit checks, especially if billing large amounts of money for the size of the business.
A business owner may also want to ask for a retainer or deposit prior to starting work or shipping products. Getting something upfront will smooth cash flow and reduce the business’s exposure to credit risk.
- Offer Multiple Payment Options
When a customer is ready to pay its bill, make it easy by offering multiple payment options. Perhaps clients will pay faster if the business accepts payment by credit cards. Many people have extra money sitting in PayPal accounts, so that is another payment option. Apple Pay and Android Pay are relatively recent options to consider adding. If the business is conducting international business, consider JCB (Japan), China UnionPay, and RuPay (India).
- Create Collections Protocols
Once an unpaid invoice has reached its 90-day mark, the chances of collecting it are about 50 percent. This means that aggressive collection processes may be in order prior to the 90-day mark.
If the invoice is due in 30 days, start immediately at that point with a friendly reminder. At 45 and 60 days, customers need a strong reminder and perhaps a phone call. At 75 days, they need to know what consequences there will be for not paying. Will the business report the customer debt to credit agencies? Will the account be turned 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 collections agency or your legal advisor. It might sound too soon, but the odds of collecting something much older go down significantly as time passes. Additionally the value of the outstanding receivable to an asset based lender or bank is practically worthless, so there is limited downside to using a collection company or incurring some minor legal fees to collect.
To ensure steady and predictable cash flow, business owners should ensure that collection protocols are in place, and then automate collection processes as much as possible.
From how business owners first engage with clients to the last steps in the collections process, there are many cost-effective techniques to avoid past due accounts and the unpleasantness that goes with them for both parties. If past due accounts are an issue in your business, try these ideas above and reach out if you’d like our help setting up accounting protocols.