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Every business is in business to make money. No business exists to go broke or fail. Yet, this could be an inevitable result of not getting paid promptly. When customers owe money, you should not have to move heaven and earth to collect what is due. Some customers are simply on the late cycle; you know they will pay, but when is always a mystery.
Other customers have no intention of ever paying you for products or services rendered. Either way, you should do whatever is necessary to protect your accounts receivable. The following tips offer some guidance on streamlining your accounts receivable system. With better management, you can increase the chances of getting paid.
Setting Up an Accounts Receivable Management System
Paid receivable are critical for any business and dealing with sluggish past due accounts can cripple your company's cash flow. Whether you have an old-fashioned spreadsheet system or a software application, you should collate all open invoices and balances when setting up a system. If your business generates more than 10 invoices every week, you might want to automate the entire billing system.
Never allow payment terms to take you by surprise: know the exact terms of the agreement, including any special internal processes customers might have that could affect prompt payment. Some customers have counter-signing or multiple approval requirements before paying an invoice. Additionally, find out how customers plan to pay. Will they mail a check, or do they have a system for paying via ACH or wire transfer? Your A/R management system should be sophisticated enough to accept a types of payment forms.
Stay away from relying on email as the primary communication medium for payment inquiries. Having little or no direct contact with your customers' accounts payable representative is a losing strategy if you want to a successful accounts receivable management system.
How to Protect Your Receivables
Begin with the end in mind for protecting your receivables. Along with vetting customers, you should:
Gather Customer Information Before Extending Credit
Gather important details about the credit worthiness of potential customers before agreeing to accept their business. Doing so puts you in a stronger position to make better decisions about extending credit. You will also protect any legal remedies if a customer fails to pay.
Develop a comprehensive credit application to collect standard elements of business, personal and banking information, and references. Include with the credit application a venue clause that is close to your office location if litigation becomes necessary. Outline your right to be reimbursed for collection expenses, and if you prefer, a personal guarantee before the application is approved.
Establish Payment Terms Upfront
Establish payment terms for each customer upfront. Some projects might require separate billing such as an hourly rate versus a single project fee. In other situations, your fees might vary depending on the volume of work/product delivery each customer requires. Furthermore, you might need to invoice some clients on a regular basis, while others change from month to month. Regardless to how or when you bill customers, make sure that the payment terms are clearly outlined.
If you have a service agreement, – either from your customer or one of your own – cover all important points in the contract. Never sign the agreement if an item requires further negotiation or clarification. Clear up fuzzy areas and get it in writing. Asks customers if they require special needs during the initial setup process. Examples of this may include purchase order numbers or a W-9 when work is completed.
These are important variables that can affect the overall structure of your accounts receivable system. Therefore, it is important to obtain agreement with the customer on how they will be billed and when you expect to receive payment.
Some customers might request 30 days; others might agree to pay within 15 days of receiving the invoice. Once payment terms are established, include reminders on invoices and make a note in the receivables system.
Additionally, make sure new customers pay the first invoice according to terms as this will set the standard for what you can expect for future payments. If there is a reason for the delay, find out why by having a timely conversation with the customer or accounts payable representative.
Use Best Practices to Invoice Customers
The goal of an invoice is to provide enough information for the customer to get it approved and paid promptly. Use a clean, professional format that includes the company logo and business information. Be clear and specific about payment terms.
For example, state “Due upon receipt” unless a previous agreement allows 15 or 30 days because the customer has a multistep approval process. Include specifics about the product or service being billed. If the invoice represents an ongoing project, breakdown the portion that you are billing for on the invoice.
If you have a sole proprietorship or work as an independent contractor, clearly state to whom the payment should be made. You want to make sure the check is written to you if you have a trade name or operate under “Doing Business As” and the bank account is in your legal name.
Be sure to keep current contact information on the accounts payable representative. Know where payments are coming from, e.g. from a corporate office out-of-state or local branch. Some customers might use a third-party vendor management system to make invoice payments.
Communicate Regularly with Customers
Before payments become too late, keep regular communications with all customers. Stay on track of transactions, from the time of delivery to when payment terms have passed. Most non-payments occur during the first 60 days because businesses failed to contact customers on a regular basis. Dedicate enough resources to establish internal processes to make sure customer contact is never insufficient or incomplete.
Include in these processes regular reviews of the aging report at least once per week. Have A/R staff make collection calls on any invoices that are past due. Customers will most likely pay sooner rather than later when they know you will call. Ignoring past due invoices is giving customers permission to also ignore what they owe.
Seeking Outside Assistance to Collect
According to a 2009 survey of finance systems specialists, at least $5,000 each month is delayed because of invoicing errors within a quarter of small and medium businesses. As much as 17 percent of SMEs lose $50,000 in billing cycles because invoices were submitted to customers with errors.
As much as collecting payments from customers is important to business survival, some businesses invest very little time monitoring receivables. There are options if you want to avoid spending too much time billing customers and avoiding costly mistakes. Solicit the help of a qualified bookkeeper to keep records straight and ensure customers are billed properly.
Time kills deals and accounts receivable debt. Lower statistical recovery follows the age of old debt. Once you pass the one year mark, recovery drops dramatically. Not many businesses can survive very long if they wait a year to make fruitful efforts to collect on past due invoices.
If payment cannot be resolved internally within the 90 to 180 day range, you might need to consider outside assistance. Begin with a collection agency and follow-up with an attorney if legal action is required. Some collection agencies have relationships with law firms and could handle this process in one step.
Keep lines of communication open with customers, but never hold files that are best handled by a collection agency. This is one of the most common errors that companies make, which ultimately cost more than it is worth. An attorney is a good resource to have for legal advice when customers do not pay on time. Uncollected balances fall into the bad debt category and will negatively affect your cash reserves and profit margins.