Each company has a way of handling accounts receivable. It makes no difference if the company’s monthly revenue is $2,000 or $200,000. A process of this nature requires management, and there are “best practices” for it, just like any other business activity you can think of.
It’s impossible to overlook the importance of accounts receivable management best practices, and entrepreneurs unfamiliar with the field can use them as a road map.
In this article, we’re going to look at accounts receivable management best practices.
1. Keep Track of Your Billing
The handling of your accounts receivable affects your bottom line. The amount of money flowing into your company is proportional to the amount your customers are willing to spend. Ensuring your company has access to cash means staying on top of billing.
Invoices are essential to keeping track of money owed to businesses, as without them, customers may forget or be unwilling to pay. Set aside time every day to produce and monitor invoices. Also, instead of mailing invoices, you may try sending them by email.
2. Don’t Leave Your Receivables Uncollected for Long
The longer an account remains unpaid, the more difficult it becomes to receive payment. Legally, some statutes prohibit debt collection after a specified period, specifically when an account becomes delinquent.
You can work with a collection agency if you don’t wish to handle collections in-house. If you don’t receive it by the due date, the personnel overseeing and managing accounts receivables should get in touch with the customer as soon as possible.
Authorize a member of the accounts receivable staff to communicate freely with the customer. Give them the floor to explain the holdup. It will aid in forging a solid connection with the client.
If a significant amount of time has passed since the due date, your staff should begin sending more forceful communication. Warning letters and emails about potential legal action for late payment can be helpful.
3. Make Sure Your Credit Policy Is Good for Your Company
You will need to remember two things when dealing with receivables. Firstly, not every individual or company is worthy of trust. A sound credit policy is essential for any company.
Secondly, you shouldn’t put too much faith in your clientele. Remember that giving a customer more credit may lead to unmanageable debt that they can’t afford to pay. That may lead a client to default.
4. Encourage Customers to Sign Up for Online Billing
Globally, businesses are increasingly encouraging customers to become paperless by providing them with electronic payments as an option. Paper bills are bad for the environment and the customer service department since they take too long to issue.
Therefore, businesses should process bills electronically and payment reminders via app notifications or email. Allow customers to make payments using a credit card, PayPal, or electronic funds transfer. Provide incentives for others to follow suit.
Furthermore, you’ll spare the client the anxiety of keeping track of when bills are due or whether or not they have sufficient funds to cover service charges. The easier you make it for your clients to make the payment, the more likely they will do so promptly and without complaint.
You may accept different currencies if you have many overseas clients. The client experience will quickly and practically improve if you provide other payment options.
Customers are more likely to pay promptly if you allow them to use their favorite method, mainly if there’s a convenient link within the digital invoice.
5. Develop a Reliable Collection Plan
An easy way to stay on top of overdue invoices is to use a modern and effective accounts receivable management system. But it won’t help you much if you don’t put that knowledge into practice.
You’ll have to devise a way to handle payments, like:
- How much will late payments’ interest be?
- How will you communicate with clients regarding overdue payments?
- How often will clients receive notifications (payment date, one week late, four weeks late, etc.)?
- How and where will the accounts receivable team document payment-related correspondence for your records?
Establish a set of effective policies, and then adhere to them. When an account is overdue, your collection team should be able to act promptly and confidently by your company’s predetermined credit procedure.
When dealing with long-term late payers, most small business owners will freeze up out of fear of alienating the client. However, non-payment problems and the resulting cash-flow crises become far more likely if you don’t have solid procedures.
Ensure that bills get swift approval from all of their authorized signatures. Keep the number of people who need to sign off on an invoice to a minimum. Any further back-and-forth between departments only delays payment.
6. Keep an Eye On Slow Payers
Anybody can delay payment, and a hiccup can occur when processing, but some individuals have serious trouble keeping up with their financial commitments. Retaining a client whose payments are routinely late may not be worth the potential future headaches.
Maybe one of these alternatives may work better for you:
- Putting an end to your business dealings with a client.
- Lowering their credit limit.
- Demanding future payments upfront.
After all, one objective of receivables management is to decrease bad debt and boost your profit, which is challenging if you’ll have to depend on clients who consistently default on their payments.
Of course, you’ll need to ensure that the policy you choose covers every client. Be careful not to seem to target particular client accounts. Instead, develop a consistent procedure for responding to overdue payments. Your terms of service should outline the repercussions for repeat violators.
Businesses suffer significant financial losses due to late payments and defaulting clients; even reliable payers sometimes have cash flow issues and default.
Despite the likelihood that most clients will pay their bills on time, each business will occasionally have delinquent accounts. Adhering to the above best practices for accounts receivable management can reduce your company’s collection issues.
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