Accounting Expert at Accounting To Taxes
Cash is vital for the smooth run of your business because, in times of requirement, you can use it to make payments for restocking, office rent, employee salary, and other operational expenses. Positive cash flow is always preferred, but it can only be maintained once you (every month) ensure that your cash outflow is less than the cash inflow. For this, a crucial part of accounting – accounts receivable management plays a vital role. It helps you ensure that your customers and whoever owes you money pay you on time.
Even if your company’s sales are steady, the continuous cash flow issues owing to inefficient management of accounts receivable can hamper your business growth.
Having an ample amount of cash inflow allows you to expand your business; for example, you can (if your budget allows) buy a building to employ more workers to do more business instead of having a small rental office space, or you can also upgrade IT infrastructure in your office to catch up with the business world.
Thus, to ensure cash continuously flows in your business accounts, you must manage accounts receivable efficiently and build strategies to spot and address cash flow issues before they become harmful to the financial health of your business. To help you with this;
Here we have mentioned important tips to improve your accounts receivable process:
1) Maintain Accurate Records of Customer Information
Keep the complete customer information in a centralized location as all the detailed information related to your customers is vital for your business as you can use it to enhance the customer experience. The centralized location of the database makes it easier and quicker to access.
Accurate information of customers also helps prevent several mistakes, for example, due to incorrect address details of a few customers, you might send invoices to wrong recipients, which is a significant factor responsible for late payments.
The data sets containing confidential information of the customers should be consistently audited to ensure accuracy. Moreover, access control measures should be followed to prevent unauthorized employees from editing customer details.
2) Create and Implement Credit Limit Policies
Limiting the credit window can help you ensure your company doesn’t provide too much credit to its customers. In fact, allow your sales force to decide which customers should be provided with how much credit in certain situations as they would know which customers are most likely to payback.
All of this would also help your sales department to determine where they need to put their best sales efforts. You can set a defined time window for approval also, ensuring your company leaders do not spend too much of their precious time deciding who gets approval for credit and who doesn’t. Try to shorten the time taken for credit approval as the more time it takes, the more harmful it could be for sales.
When credits will be paid back on time, it will add to an effective accounts receivable management.
3) Instant Invoicing
No one wants to get paid late. Delay in invoicing is a big reason behind the delay in receiving payments. Improve your invoicing process; for example, just as a sale is made, send the product or service invoice to the customer instantly instead of after a few hours. This way, the customer is likely to pay more quickly because it is a fresh purchase. If the customer receives invoice 8-12 hours after the purchase is made, the customer might not pay attention to it and is more likely to delay the payment. Expedite your invoicing process to ensure your customers pay you on time.
4) Offer Multiple Payment Methods
You might already be using some payment methods such as a paycheck, cash, bank transfer, etc. But the more methods you offer to your customers, the better. The speed at which your accounts will be credited will vary with the mode of payment. For example, today’s online payment methods such as PayPal, Google Pay, and other online payment applications for smartphones can transfer money in less than a minute, whereas, net banking may take 12 to 72 hours or 2-3 business days to complete a transaction.
Though your customers will use the payment method they prefer, offering multiple methods will ensure most customers make payments on time.
5) Send Payment Reminders
To improve the AR process, it is best to follow up on customers that have not processed your invoices even after the due date and those who have their payment due date near. Sending a reminder to such customers increases the chances of payments getting done soon. For example, as you have already sent the invoice a month ago with a due date for payment, send them a reminder a week before the due date, then 3 days before the due date, and if the payment is still pending, give them a call on the due date. However, avoid sending too many reminders as it might annoy the customers.
Also, be very careful while sending the reminder as you need to tell your concern in a friendly yet professional way. In the message, you can mention the due date that is approaching and even the payment methods you accept. It would be even better if you include a link to a payment gateway or website; this would make it convenient for the customers to pay quickly.
6) Have an Automated Account Receivable System
Tracking down accounts receivable, following up on customers with a forthcoming due date, sending them reminders can take a toll on your business as all of this can consume a lot of your valuable time. Moreover, these concerns might keep you too distracted to focus on business growth.
To tackle these challenges, having an accounts receivable system that can automatically make a list of customers with pending payment, send them a reminder, and report you on the status of the payment in real-time.
7) Outsource Your AR Process
Managing accounts receivable can take a lot of your time and effort; if you try to reduce your effort and save time, you might need to hire a collection team that would dedicatedly focus on managing the AR. Now, this might turn out to be costly as you would need to pay not just for their salaries but for their health insurance, sick leaves, travel compensation (if they need to visit a customer to collect payment), pension plan, etc.
Thus, you might want to consider accounts receivable outsourcing services. Outsourcing your AR process to a reputed and reliable service provider can be advantageous for you as the process will be managed by industry experts who usually have vast experience in providing accounting outsourcing services to multiple businesses in different verticals across the globe. They will know how to get your money in your business accounts efficiently and quickly.
Another advantage is that, unlike an in-house collection team, you will be paying them on an hourly basis. This will help you reduce your overhead while getting the work done in less time at affordable costs. Moreover, you will get more time to focus on more important business aspects – Marketing & Sales.
A consistent income is a basic necessity for your business. It is actually vital for your business’s long-term performance, growth, and expansion. Regular income also depends upon how effective your accounts receivable process is and how smoothly it maximizes positive cash flow.
Though collection problems are common in any business, the tips discussed above will help you improve your AR process and avoid multiple issues arise due to late payments and overdue payments. As we also discussed how outsourcing could be hugely beneficial, it is advised to consider outsourcing your accounts receivable to reduce your burden, enhance efficiency and productivity of your core business operations, and achieve optimum business growth.
Tracy Watson works as an Accounting Expert at Accounting To Taxes, a renowned company offering Tax, Financial, Bookkeeping and Account Receivable Service. She is passionate about writing about finance & accounting, small business growth, and entrepreneurship. She is continuously contributing her skills, knowledge, and experience in assisting people with finance and accounting matters.