March 16, 2013
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“When asked whether they’d prefer to have cash or accounts receivable, many small business owners would probably answer cash. However, not all small businesses use cash-based operating models,” according to the Houston Chronicle.
“Businesses such as consulting or medical practices don’t collect all money right away and must wait to get paid. When you sell goods or services, and you’re not paid in full, you set up accounts receivable in your accounting system.”
This money owed to your business by clients, customers or debtors should be a number one priority. Therefore, in order to properly manage receivables and get paid on time, you have to become a pro at the account receivables (A/R) process.
If you are ready to take control of your receivables management, here’s everything you need to know about your receivables, from A to Z.
A-Z: 26 Things You Should Know About Receivables Management
A – Aging Report: The accounts receivable aging report shows the amount of money owed to a company, along with the amount of time those accounts have been past due. They tend to be broken up as “current”, “0-30 days past due”, “31-60 days past due”, “61-90 days past due”, “91-120 days past due” and “over 120 days past due”.
B – Bankruptcy: When a client who owes you money files for bankruptcy, your first reaction might be to try to collect the money – don’t do it. You could actually violate the bankruptcy code and get sued yourself. The matter is in the hands of the court system and you will have to wait patiently for the bankruptcy proceedings to take their course. In the meantime, proceed under the assumption that you will not recover the funds and consult with your CPA about claiming the loss as a deduction on your taxes.
C – CRM: CRM is naturally associated with sales, but what most forget is that receivables management is part of the sales cycle. If you “made a sale”, it doesn’t mean anything until that check is in the mail. Therefore you should treat your accounts receivables management (ARM) as you do CRM. Make it a habit to take notes on contact with customers about payment, keeping everyone on the team in the know on where a payment stands, and allowing yourself to properly structure your collections process.
D – Days Sales Outstanding (DSO): DSO is a small business’ best barometer for determining financial health. It is the calculation of the average number of days that it takes a company to get paid after a sale has been made (the lower the number, the healthier your cashflow). According to Sageworks, the average DSO for private companies has increased from 37.9 in January 2012 to 45.3 in January 2013.
E – Electronic Payments: If you’re not accepting electronic payments, you’re asking for customers to pay you late. In fact, a study by CashEdge shows that 72% of small business would prefer online payments. Not only does offering electronic payments incentivize your customers to pay earlier, aligning with the method in which they prefer to pay, but it also cuts out the time you have to wait for the check in the mail, immediately speeding up the cash flow cycle.
F – Financing: For those of you who are dealing with the headache of extended payment terms and slow paying customers, financing your invoices could be the cure. Improve your cash flow by turning your unpaid receivables into cash. Invoice financing companies offer an up to 90% advance on the value of your receivables and most of them specialize in financing small businesses.
G – Guarantee: Extending credit to customers is always a little risky. You never know for certain if someone is going to pay. However, there is a way to give yourself a little reassurance: receivables insurance. Accounts receivables insurance is just as it sounds: commercial insurers protect you against defaults on open accounts. You would be protected in the event that your client suddenly declares bankruptcy, goes out of business, or if, say, there’s a natural disaster that prevents payment.
H – Help: Sometimes, despite your best efforts, you just can’t get a customer to pay on time. If delinquent accounts are hurting your company’s bottom line, don’t be afraid to ask for help. Use a CRM for accounts receivable management tool, consult with a collections company, call your CPA, or speak with an attorney to find out what your options are.
I – Invoices: When it comes to invoices, the wording you choose to include can literally affect the time frame in which you receive the check. For example, by including a “please” or “thank you”, you can increase your chances of getting paid by over 5%. If you avoid jargon (see below) such as “net terms” and be more specific with a phrase like “14 days to pay” you’ll get paid faster, and even faster than you would by asking for immediate payment.
J – Jargon: Accounts receivable jargon is very specific and can be a foreign language to non-accounting professionals. So, when you refer to a payment advice, remittance, or net terms to an account debtor (I mean customer), they might not know what you’re talking about. Ensure your message is understood by using more commonly employed words (for example: use “payment” instead of “remittance”).
K – Keeping in Touch: Sometimes forgetting a payment is all too easy. We’ve all done it before: received a bill in the mail, got distracted, pushed it to the side, and slowly things pile up over it. That’s why it’s crucial to remind customers. Whether by giving them a call or sending them a friendly email or reminder letter in the mail, you’re helping your customers pay on time. In fact, reminder letters increase collectability rates by over 4%.
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