Your accounts receivable is essentially a list of all the money your clients or customers owe you. While retailers typically receive payment for their goods when the customer purchases them, this isn’t always true. Companies that provide services often don’t receive full payments when those services are rendered. Instead, they invoice their clients. This creates a period where you’ve already supplied the goods or provided the services but have not been paid for them. You know the money is coming, but you don’t have it yet. Keeping track of your accounts receivable gives you an idea of how much money you will have to spend soon, plus it tells you which clients still need to pay.
Many new business owners aren’t experienced with dealing with accounts receivable. That’s because individuals rarely have outstanding income. However, tracking your accounts receivable is vital to making important business decisions. Here are a few ways you can improve your accounts receivable process so you can leverage that money without overspending.
Invoice as Soon as You Can
Why wait until the end of the month, quarter, or other period of time to send out an invoice? If you have an agreement with a recurring client that you will invoice at specific times, that’s different. However, if you do not have such an agreement, you can invoice as soon as you provide the goods or services. Invoicing quickly puts your bill on the customer’s radar. While some may wait until the first of the month to pay, others may process payment as soon as they receive the invoice. That means you get your money much faster. If possible, send out invoices at least weekly, if not a few times a week. You may even be able to prepare and send out invoices at the end of every day. The bottom line is that the faster you invoice, the fast you start the clock, the faster you get paid.
Switch to Prepayment
If possible, switch from an invoicing model to a prepayment model. Your clients will pay when they order or when they come in for services rather than paying once you invoice them. Some customers, especially individuals, may be on board with this. However, if you are providing goods or services to another business, they may insist on being invoiced and paying later. That’s because they may have the same issue—their cash is tied up in accounts receivable, and they simply cannot pay you until their clients pay them.
Smaller businesses that haven’t fully moved to an accounts payable/accounts receivable accounting method are more likely to agree to prepaying or paying at the time of service. However, medium to large businesses may not be so agreeable to that agreement. You may be able to work on a prepayment model while you are a smaller business, but as you grow and begin taking on larger clients, you may need to switch to invoicing and accounts receivable.
Offer Automatic Payments
If you have regular clients who have you on retainer or have subscribed to a specific monthly plan, you may want to consider offering automatic billing. Many payment processors have implemented this option. Instead of invoicing and waiting for the client to pay, the client provides their banking details and opts into auto-billing. Rather than invoicing the client, you may make a payment request through the processor, and that processor automatically debits the client’s account and transfers money to you.
The advantage here is that you get paid almost immediately. You don’t have to wait for the client to process your invoice and release payment. This is a much faster way of invoicing, so you aren’t waiting weeks or even months for your money. You may have to pay a small fee to the payment processor, but that fee is typically very low and won’t impact your profit margins much.
You may have to do a little extra work—your clients will likely still want a copy of their invoice, so you’ll still have to prepare and send it to them in addition to submitting the payment requests. However, getting your money more quickly often outweighs this small amount of extra work.
Make Use of Automation
While using auto-billing may make a little extra work, implementing certain accounting software can reduce work and actually create a net gain for you. This software can be set up to do tasks such as automatically prepare an invoice for recurring charges. If you have clients who subscribe to your services every month, you won’t need to manually make an invoice for them. This software will do it for you, so all you have to do is send it out. You may not even have to do that—some programs can interface with your email and send invoices, payment reminders, and other messages automatically.
If you have most or all of your clients on a recurring subscription or retainer, investing in accounting software with these features can essentially eliminate the need to prepare invoices. Everything can be done automatically. You may even find software that works with your payment processor, so you don’t even have to submit payment requests. The more automated your system is, the less time you have to spend doing these tasks.
Avoid Dealing with Unpaid Accounts
By moving to a prepayment model or by enabling automatic drafts, you will be better able to avoid dealing with clients who do not pay their invoices timely. Sometimes this can truly be a matter of the client simply forgetting about an invoice or having some sort of emergency. In that case, a reminder email is usually enough to get them to pay. If they’re still late, you may want to reach out via phone.
However, you may have a client that dodges your attempts to communicate and goes months without paying. When that occurs, you have two choices: write off the invoiced amount as a loss and blacklist the client or, if the amount is significant, employ a debt collection agency to attempt to recover some of the funds. You may even sell off some debt to immediately recoup at least some of the costs you incurred. Either way, you’re not going to make any money when a client doesn’t pay. At best, you’ll break even or take a small loss.
Because of this, it’s a good idea to encourage clients to sign up for auto-drafts. Some businesses even offer a small discount or other benefit for clients who do. Even if you don’t, you can point out that auto-drafts benefit your customers. If you invoice monthly, you can allow them to set the day the payment is processed so they always know when the payment occurs. They also don’t have to do anything to initiate the payment, so even if they forget, it still goes through. They avoid any late fees or other costs.
Avoid High Credit Usage
By better leveraging your accounts receivable, you’ll be able to avoid the temptation of making purchases on credit. Many businesses, especially new businesses, tend to make high use of credit. Once your accounts receivable are automated and you have more cash on hand, you want to make smart decisions regarding your credit.
Ideally, you’ll begin reducing your debt. While you may need to make use of credit for large or unexpected purchases, you do want to do your best to decrease your reliance on it. When you do have to dip into your credit, you should now be able to more quickly pay that debt off. You may also want to use your stronger cash flow to reduce any high-interest debt you have. The fewer claims on your cash you have, the better you can leverage your income to grow your business.
Call the Experts at Protea Financial to Help Improve Your Accounts Receivables
You have a lot of work to do leading, maintaining, and growing your business. You’re also probably not a financial expert, so dealing with your accounts receivable, invoicing, and following up with clients who haven’t paid isn’t exactly something you want to focus on. Dealing with your finances in general, may be something you took on because you’re the head of the business and someone has to do it. You may not be ready to hire someone full-time to serve as your chief financial officer or accounts expert, either.
That doesn’t mean you can’t have a professional on your team, though. Here at Protea Financial, we provide virtual bookkeeping, accounting backup, payroll, compliance, and other solutions to companies that don’t need someone in-house but still want an expert to handle things. Whether you only need a few hours here and there for invoicing and payroll or want the advice of a virtual CFO, we’re here for you.
As a virtual bookkeeping team, Protea Financial is available when you need us no matter where you are. We work with you via email, phone calls, and teleconferencing, and we can take on as much or as little of your bookkeeping tasks as you’d like. We work with everything from small businesses to those that have grown to include multiple sites or have locations in several states. If you’re in need of an expert to help you organize your accounts receivable and improve your processes, contact Protea Financial today.
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