This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.
Cash flow is the life blood of small businesses, and having a strong accounts receivable policy can help businesses better manage finances. From when to bill to when you should collect, it can be tricky to recoup the money you need in time to reinvest it into your business — or spend it.
According to Deloitte, there are several common signs of businesses with a weak accounts receivable policy, such as failing to follow up with customers when payments are past due, not paying attention to the accuracy of bills or invoices, and allocating cash payments incorrectly, making it more difficult to identify outstanding payments.
Growth in digital payments and technologies has bolstered new ways of accepting payments. Here are a few ways you can optimize your accounts receivable.
What are accounts receivable?
Accounts receivables are money owed to a business by its debtors, such as customers. Accounts receivables are typically classified as “Current Assets” on your balance sheet since they are typically paid back to the business within the year. Actively managing your accounts receivables plays an important part in ensuring predictable cash flows and that your business is properly paid for your services.
Businesses need receivables automation to keep cash flow positive during the pandemic recovery, according to a recent Mercator Advisory Group report. Automating systems and processes around accounts receivables are not only rising in priority, but they could also affect cash flow.
Effectively track accounts receivable
Some businesses track accounts receivables on a balance sheet, logging incoming cash by hand or manually in a spreadsheet. However, there are many businesses that use invoicing software to track accounts receivables and generate regular reports to help you manage your payments. Here are a few ways that using software might better help you track incoming cash:
- Track which accounts are outstanding and highlight payment trends
- Access accounts regularly, all in one place
- Catch mistakes early
- Run reports to see overdue payments by size or lateness
Tracking your accounts receivables proactively allows you to follow up as soon as invoice due dates have passed and prioritize important payments. By tracking the cash coming into your business, you are also creating a digital record for clients and regulators.
Offer online billing
Using an electronic billing system allows customers to download their invoices directly into their own accounting system. This will also save time usually spent in the delivery process if you mail invoices. Another advantage of billing electronically is that you can set different payment terms — including shorter ones or installments — rather than collecting the money in one large payment.
One that’s commonly used is a net-30 payment term, meaning a customer has 30 days to pay once they are billed, after the sale, after the delivery, or after the invoice. If 30 days is too long for your business to wait without your cash flow being affected, you can offer shorter repayment terms like net-7 or net-15 alternatives.
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Make payments easy for customers
An easy-to-use payment platform will help customers pay and can help reduce friction. One example of this is the use of smart inputs that can autofill fields like address, ZIP code, and phone number, so customers do not have to fill this out each time they log on.
From checks to credit cards, providing customers with multiple payment options is a convenient way to potentially expedite a payment to your business.
Automate invoice reminders
Many small business owners are struggling with late payments or invoices that aren’t paid at all, ultimately affecting their cash flow. By automating invoice reminders like email, text messages, or phone calls, you can help reduce human error and maximize your time. Not only can automating reminders field faster payments, they can also help you save time and attention. If you are using Square Invoices, you can schedule follow-up reminders when invoices are past due, take a partial payment, attach contracts, and filter your invoices by those that have a payment pending, are outstanding, and paid.
Many businesses have struggled to manage cash flow during the COVID-19 pandemic, and many saw outstanding payments from vendors and partners slow or even stop.
Poor receivables can impact credit, financing, and cash flow management, so optimizing the process through automation when possible can save you time and money.