Proper cash flow management is always essential for any organization. One of the causes of cash flow problems is poorly managed Account Receivables. Don’t assume that just because a customer purchased your product or services that they will pay you in a timely manner or at all.
Slow-paying customers may require you to draw down your cash reserves or increase the amount of financing you need to cover your operations. As delinquent accounts get and keep up older, the probability of collecting those accounts diminishes. And, of course, moreover the more cash you have tied up in receivables, the less cash is available for running your business.
For not for profits and charities, slow collection of donation pledges and annual membership dues can put a strain on cash flow. While donations and membership dues are not technically accounted receivable, many of the same best practices can be applied to accelerate up the collections from your funding sources. Awareness of accounts receivables best practices becomes even more imperative for not-for-profit organizations engaging in the sale of products and services to increase funding.
So, simply follow these ten best practices to improve the Account Receivables process, which should improve the cash flow and strengthen the bottom line:
-
Email Invoices
This will make sure that your customers receive your invoices immediately, avoiding mail delays. Confirm with your customers which email address they wish you to send invoices to.
-
Shorten Payment Terms
In the days of checks and paper invoices, it was fairly common for businesses to extend credit to customers to allow for mail and payment delays by granting credit terms, for example, “Net 30”. Moreover, with the widespread adoption of email communication and electronic payment methods, businesses are now more common specifying “Payment due upon receipt.”
-
Have EFT and Other Payment Options
An increasing number of businesses are now paying their suppliers with the help of electronic funds transfer. By specifying on your invoice that payment may be made by the EFT, you will enable your customers to deposit the payment directly to your bank account. Simply include on your invoice your EFT banking information; bank, account number, and branch. Also, consider using credit cards or PayPal.
-
Establish Credit Policies
If at any point in time, you were going to extend a customer credit, it would be a good idea to assess their ability to pay. The expense of performing credit checks may be more than worthwhile for many businesses.
-
Review Account Receivables Regularly
Track the aging of your Account Receivables and systematically follow up on any accounts that are past due more than a predetermined number of days. A best practice is to run an aged receivables report from your accounting system on a weekly basis, paying special attention to any receivables that are over, for example, 20, or 30 days old.
-
Use the Telephone
Follow-up with unpaid invoices with a phone call if payment has not been received within a reasonable period. Written collection letters and even emails are usually less effective as they do not engage the customer in conversation. The fastest way to find out if there is a problem with payment is to speak with your customer. Solving the problem in a manner that maintains a good customer relationship is also more likely if there is such a conversation.
-
Maintain a Collections Record
For each overdue account, keep a log of when follow-up calls or emails were sent, along with a record of customer’s responses to follow-up calls. Knowing that, for example, your customer promised to make a payment by a certain date will be invaluable if additional follow-up calls are required.
-
Offer Discounts for Early Payment
Payments are often made firstly to companies that offer discounts. The popular 2%/10, net 30 days terms mean that if a customer pays within the time period of 10 days, they receive a 2% discount, with the total due in 30 days. Try 2%/10, Net 20 Days. A customer may be less inclined to forgo a discount when the payment is due in only ten more days anyway.
-
Use a Factoring Service
Using a factoring service is like selling your receivables to a third party at a discount. The costs involved with this method may be justified by greatly improving your cash flow, especially if you have a long collection cycle.
-
Use a Collection Agency
If you are unable to collect, then you should submit the account to a collection agency. No one can guarantee to collect your outstanding receivables, but these companies tend to be very aggressive, and since they tend to charge based on the amount which they collect, this is a viable find option. Don’t expect to see any new business from these customers, but then they are not the kind of customers you want anyway.
Conclusion
Managing your accounts receivables is normally pretty straightforward as most customers pay on time. Moreover, collection problems can be avoided or at least minimized with a strategy that considers the above best practices.
