A business needs accounts receivable to survive. After all, the goal is to provide a product or service and to get paid for it. However, mis-management of accounts receivable can lead it to get too high, which in turn can lead to unexpected financing, and a cash crunch that can harm a business and stop it from growing. A high accounts receivable from the outside can seem like a good thing, and a sign of a successful business. But the sign of a truly healthy business is one that can manage the flow of cash in and out all while keeping it balanced.
- Back to the Basics – Do you know what the standard account receivable is for your industry? Understanding what others are doing in similar fields will give you a good basis for where your business should be. By searching in trade groups and data providers for commercial business, you can get a good starting point for your goal.
- Credit Checking and Policies– Knowing your customers before lending can lead to fewer problems down the road. Checking credit and asking for credit references is a good way to set yourself up for success by setting up terms and limits to cater to your customers. When documenting these policies, it’s important to lay out terms, due dates, and possible rewards or penalties.
- Invoicing – Taking a look at your invoicing process can lead to opportunities for improving your accounts receivable. Look for wording on your invoices. Giving a customer a time frame to pay is preferred than requesting it be due immediately. Invoicing more often than once a month can help to increase the flow of cash. Offering options for customers to pay can open to doors to quick payments and happier customers.
- Monitoring – Make sure to monitor all unpaid invoices and to follow-up within the provided timeline. Setting a clear expectation helps to avoid confusion and to streamline the process with repeat customers. Be polite and understanding when following up but remaining firm and sticking to your timeline will set a precedent. Monitoring can make sure that cash comes in before it is needed and alert you to problems before they become too big to handle.
- Risk – Ideally, a business spreads it’s risk by selling to new customers and increasing the receivables over a large number of clients. However, that is not always feasible. Incentives are a great way to keep the fewer, larger clients paying in a timely manner so your business is not held up by waiting on their payments.
Following these simple hints and tricks can help a business to maintain a healthy cash flow and to keep accounts receivables at a manageable level. In the end, keeping customers and clients happy, maintaining open lines of communication, and maintaining relationships only help to increase the success of your business!