Navigating Accounts Receivable for Building Success

Business owners can't manage what they can't measure. In small-business finance, this adage can be especially true when managing your accounts receivable. Effective management of accounts receivable means knowing where your cash flow is coming from and keeping careful track of who owes your business money. That can require a strategic approach to regularly collecting what your business is owed, which can be crucial for achieving financial success in business. 

Excelling at strategically managing your organization’s accounts receivable can be paramount to small-business prosperity. Not taking a strategic approach to collecting your A/R can lead to cash-flow issues. “If you don't manage your A/R well, that can bring your business down because it means your business’s money is money tied up in somebody else's hands,” says Paige Oldham, founder of The Mindful CFO. “You need your cash flow to be regular so you can pay yourself, your employees, and keep your doors open,” she adds.

These strategies can help you optimize this fundamental component of your company's financial health. From building strong customer relationships to using technology like accounts receivable management services, all can play an essential role in measuring and managing your A/R.

Understanding Accounts Receivable Management

At its core, accounts receivable management involves overseeing tracking and collecting payments owed by customers. “Anytime you make a sale, that produces a receivable owed to you by your customer or client,” says Oldham, who offers fractional CFO services to small businesses. “You need to collect that money as quickly as possible to maintain solid cash flow,” she adds.

A/R includes invoicing, payment tracking, and following up on overdue accounts. The primary goal is to ensure timely collection of payments while maintaining positive relationships with customers. It helps prevent debt owed to your business from becoming uncollectable. 

To help achieve this, businesses set clear processes for their accounts receivable goals. These goals typically revolve around improving cash flow, reducing outstanding balances, and minimizing the risk of bad debt. By establishing specific objectives, businesses can focus their efforts and measure their progress effectively. Here are several key components of effective accounts receivables management:

• Clear goal setting: Establish specific objectives for accounts receivable processes, such as improving cash flow and reducing outstanding balances. 
• Credit management: Evaluate customer creditworthiness to set credit limits and monitor customer payment patterns to identify risks or changes.
• Efficient invoicing: Streamline the invoicing process to ensure prompt delivery of invoices and clear communication of payment terms. 
• Timely follow-up: Implement procedures for tracking overdue accounts and starting follow-up actions, such as reminder emails or phone calls. 
• Customer communication: Maintain open and transparent communication with customers regarding payment terms and expectations.

“One of your most important goals is getting customers to pay when or as soon after a transaction happens,” explains Oldham. “Send your invoices out in a timely manner and make sure you have follow-up steps in place to collect your money,” she adds.

Strategies for Effective Management of Receivables

Establishing clear goals is just the first step. To truly optimize accounts receivable management, businesses should consider incorporating core practices into their business operations. This involves not only setting targets but also implementing measures to achieve them efficiently.

Adopting A/R technology can help streamline invoicing and payment processing, reducing delays and errors. Businesses that leverage automation tools for accounts receivable management can experience significant improvements in efficiently collecting invoices and cash flow.

"One of your most important goals is getting customers to pay when or as soon after a transaction happens. Send your invoices out in a timely manner and make sure you have follow-up steps in place to collect your money." —Paige Oldham, founder, The Mindful CFO 

Businesses should regularly review and adjust their A/R management strategies based on business performance and market conditions. By taking an adaptive approach that periodically assesses objectives against current realities, companies can help ensure their A/R strategies stay aligned with goals as business factors evolve. This continual refinement process helps maximize the effectiveness of A/R management efforts in supporting the evolving needs of the business.

Here are some business processes you should have in place to help the management of receivables: 

• Embrace technology: Adopting accounting software or using an accounts receivables management service allows automating repetitive tasks like billing and deposits, helping to save time and improve accuracy over manual processes. Using automation tools for invoicing and payment processing can also help streamline A/R operations, reduce errors, and ensure faster payments. Look for integrated payment solutions that make it easy for customers to pay online or via mobile apps.
• Conduct regular receivables reviews: Routinely analyze collection metrics, operational issues, and market factors to assess progress towards your accounts receivable goals and develop action plans for continually refining accounts receivable management strategies.
• Adopt customer segmentation: Analyzing payment behaviors allows splitting the customer base into risk tiers like low, medium, and high. Target high-risk customers who often pay late with more assertive collection strategies to help reduce write-offs.
• Offer payment incentives to customers: These may encourage customers accustomed to making slow payments to change these behaviors. Provide incentives for early payment or prompt settlement of overdue accounts to help encourage timely payments.
• Collaborate across teams: Involving sales, customer service, and finance in collection efforts helps ensure everyone has visibility into account issues or concerns that could impact payments. Timely communication between departments helps address customer needs quickly and avoid potential disputes that slow cash flow. If you outsource your A/R to a bookkeeper or A/R management service, be sure your policies and theirs align.

“Offering enticements as part of your payment terms may get you your cash faster,” says Oldham. Whether it's a 2% discount for payment within 10 days or waiving late fees for settling an overdue invoice by a certain date, consider options to get your customers to pay you on time, or at least in full when they pay late.

Best Practices for Effective Accounts Receivable Management

Effective accounts receivable management requires implementing best practices to help optimize payment collection processes and maintain healthy client relationships. Here are several that you should consider using to strategically collect what's owed to your business and help keep your cash flow solid.

1. Build strong client relationships: Fostering trust and transparency through clear communication and engagement helps build loyal customers who are more willing to pay promptly. Tracking interactions and preferences in a CRM program can enhance engagement. Sending thank-you notes after transactions shows appreciation, which can help strengthen relationships and encourage timely payments.
2. Establish clear collection procedures: Having step-by-step methods for payment follow-up at different delinquency stages streamlines handling of late and non-paying accounts. This can help reduce the likelihood of debt becoming uncollectible. 
3. Monitor your clients' industries: By following developments in your clients' business sectors, like layoffs or business failures, you can expect risks to their revenue streams and adjust. You can then adapt payment terms with an understanding of the potential economic pressures buyers face with cash flow.
4. Train your staff on your A/R policies: Educating all employees involved in A/R can prevent inconsistent application of payment policies that can damage customer relationships and lead to poor accounting or legal compliance. Standardized training can also help increase staff confidence in representing company policies to buyers, too, and can limit nonpaying customers. If you use a bookkeeper, make sure they understand your company policies related to A/R.
5. Benchmark against industry metrics: Use industry data regularly and effectively. Compare your A/R performance with your industry peers to help reveal your strongest and weakest practices in cash recovery. With insight into those metrics, you can help improve your cash collection with specific process revisions.
6. Cross-train staff for employee absences or gaps: Ensure multiple staff understand each client's payment histories and current statuses. Identify employees who have thorough knowledge of accounts who can assume responsibility for clients if another employee is absent or leaves. That can help you avoid delays in collecting outstanding balances during staff transitions.

The Importance of Accounts Receivables Assessments

An accounts receivable assessment involves analyzing the aging of outstanding invoices to identify overdue accounts and assess the effectiveness of collection efforts. “You need to regularly age your receivables to determine whether you're collecting money owed to your business steadily and efficiently,” says Oldham.

Your business should consider creating and reviewing its accounts receivable aging report frequently to determine the average time to collect payments and prioritize follow-up actions based on the age of outstanding invoices.

Here's a sample accounts receivable assessment:

Accounts Receivable Assessment

As of December 31, 2023

Total Accounts Receivable Balance: $500,000

Aging of Accounts Receivable:

Current (0-30 days): $250,000 (50% of total) 

31-60 days: $100,000 (20% of total)

61-90 days: $50,000 (10% of total) 

Over 90 days: $100,000 (20% of total)

Estimated Uncollectible Amounts:

We estimate that 5% of receivables outstanding 0-30 days will be uncollectible, totaling $12,500.

10% of receivables outstanding 31-60 days will be uncollectible, totaling $10,000. 

25% of receivables outstanding 61-90 days will be uncollectible, totaling $12,500.

50% of receivables over 90 days will be uncollectible, totaling $50,000.

Estimated Allowance for Doubtful Accounts: $85,000

Net Realizable Value of Accounts Receivable: $415,000

Conducting an accounts receivable assessment helps you assess the collectability of your company's accounts receivable balances based on this aging analysis and estimate uncollectible amounts. Performing regular assessments based on the aging of debt provides insight into the quality of outstanding receivables and the amount of cash expected to be collected.

A Bridge to Small Business Financial Agility

Managing accounts receivable strategically can lead to managing your cash flow effectively. It's one of the most important practices to help ensure the financial prosperity of your business and keep it agile. Learn how to apply more best practices for managing small business cash flow. 

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