Many people get confused with the terms accounts receivable and accounts payable. Accounts receivable is basically money that is owed to you, and accounts payable is what you owe. We are going to cover accounts receivable and ways to improve collections in this article.
In a perfect world, you would hand your customer their bill or invoice, and they pay it right away. Unfortunately, we do not live in a perfect world. Sometimes customers forget to pay their bills, or they avoid paying them at all for many different reasons, leaving you in the lurch. Optimizing your accounts receivable process can drastically improve your money flow. It can also help you avoid finding yourself in the bad situation of being owed too much money. By maintaining a good accounts receivable and collections process, you can avoid having existing capital go to waste, increase liquidity, reduce your own debt, fund growth, and roll ahead of your competition.
Six Tips for Collecting Accounts Receivable
1. Don’t be shy!
Discuss payment arrangements early in the negotiation and relationship building process. Explaining to your customer how and when you expect to be paid prevents a lot of headaches and heartaches down the road. Offering options like automatic payments, credit, and electronic payments make the process much easier and more friendly to customers. Also do not hesitate to shorten payment terms. Net-30 is popular, but often using shorter payment terms such as Net-15 encourages slow-paying customers to stay on track. Also, offering a small discount for early payment can encourage slow pays to step up their game.
2. Establish a clear and concise credit approval process.
Be leery about extending credit without vetting the customer thoroughly. It is very easy to set up a credit account, but not always so easy to get paid. Make sure your customers are creditworthy and weigh each situation carefully. It is easy to fall into the trap of offering credit to non-credit worthy customers to boost sales. This can result in a vicious cycle of not having enough products for people who actually will pay. It also may lead to a lack of liquidity to purchase more products.
3. Follow up on past due accounts quickly and develop a proactive collections process.
Collections should be a top priority. Gentle reminders to customers often result in immediate payment. Collection efforts should be consistent, fair, and methodical with no emotion. If you find you have trouble distancing yourself from situations that might be uncomfortable or confrontational, you can always outsource your collections. Just make sure your collections company is reputable, and vet them for professionalism. There are many laws that must be followed for collections and not all collection agencies are honest.
4. Maintain accurate customer data.
Once a year, reach out to your customers to make sure you have up-to-date information on record. Regularly audit customers to see if a customer has a pattern of late pays, or no pays. You also want to check for anyone who has run up an exceptionally large credit bill. Sometimes, you may have to put a hold on a customer’s account.
5. Create a billing dispute process.
It is very important to develop this process as it helps employees and customers resolve a situation quickly and effectively. An inconsistent or stress-inducing billing dispute can cost you a good customer. No matter how frustrated you are, always treat the customer with respect and kindness.
6. Automate, automate, automate.
Make it easy for your customers to pay you, and they will. Nobody likes to sit down and write checks. It is so much easier to send electronic bills with electronic payment options. As a bonus, you get paid faster!
Collections is not the dirty word so many of us think of it as. Most people want to pay their bills. Follow the above recommendations and you should be good to go forth and conquer your corner of the business world!
Accounovation is a technology-driven, process-focused, and people-powered accounting firm. We are experts in helping you set up best practices for both Accounts Receivable and Accounts Payable. We can guide you and assist you in getting your accounting program up and running. Please feel free to contact us for more information.