2 Fast Ways to Improve Accounts Receivable Collections

Man chasing dollar bills with butterfly net

There are a number of ways to improve your accounts receivable collections, and there are many good reasons to spend some time doing so. In 2019 Intuit released a global study about the cash flow challenges experienced by small business owners, entrepreneurs and the self-employed. They found that 62% have cash flow problems and as a result over 1/3 can’t meet their financial obligations, including paying vendors and employees or themselves.

One third (33%) of U.S. small business owners estimate their company currently has more than $20,000 in outstanding receivables, and the average U.S. small business has $53,399 in outstanding receivables.

We can’t think of a less expensive way to improve cash flow than collecting the money that’s already owed to you.

In this article we’ll discuss 2 ways you can improve your accounts receivable collections quickly and easily.

2 Fast Ways to Improve Accounts Receivable Collections

1. Invoice Correctly and On Time

One of the fastest ways to improve your accounts receivable collections results is to improve your invoicing process. Late and inaccurate invoicing are the most commonly used excuses/reasons for not paying an invoice on time. For a complete discussion about common invoicing errors read our article about it here.

8 Ways to Quickly Improve Your Invoicing Process

  1. Email your invoice as soon after delivery of your product or service as possible. In our experience it’s common for small businesses to send invoices a week or more after the product or service was delivered. Aside from the obvious reality that no one is going to pay an invoice they don’t have, late invoices encourage disputes – memory failure and confusion are common ways to delay payment. The later the invoice arrives the more likely the customer is to forget or complain. If you expect your customer to pay in a timely manner – provide the invoice in a timely manner.
  2. Invoice in advance of providing service whenever possible, especially for a new customer. Unless you have a strong vetting process in place, invoice new customers in advance. This is particularly important for large and rush orders from customers you don’t know. New customers expect to be asked to pay in advance, so don’t be afraid to ask. Invoicing in advance improves cash flow and gives you time to complete a thorough credit check.
  3. Provide a complete description of the service provided. An invoice with an amount but no description of the service provided is simply begging for dispute and delay. To easily reduce collection effort and encourage prompt payment be sure to describe in detail what service was provided, what product was delivered, and when the product or service was delivered.
  4. Date your invoice correctly. The correct date for an invoice is the date you create and send the invoice. It’s tempting to want to use the date the service was provided and if you’re invoicing within a day or so that will be fine, but if you’re late you’ll need to use the date you created the invoice.
  5. Provide a due date. Make it easy for your customers to schedule payment, provide the date the invoice is due so your customer can avoid late payment without thinking too much about it.
  6. Provide terms. For many small businesses standard 30-day terms are acceptable, but they aren’t necessarily right for your business. Payment terms must fit the business. At CA$H IN we routinely recommend that service businesses shorten their terms to net 10 or net 15, reflecting and adjusting to the reality that service, as opposed to product, which we may continue using indefinitely, loses its value as soon as the service is rendered. Once the value is gone the desire or sense of obligation to pay is greatly reduced in many people. This is particularly true when cash gets tight and your customer needs justification to pay late or not at all!  It is important to establish goals, operating ideals and benchmarks. Industry standards are a good place to start. However, it is even more important to analyze the actual situation in your company before finalizing your terms.
  7. Provide payment options. Make it easy for your customers to pay you. In addition to easy to understand invoices with a description, terms and a due date you’ll want to give your customers as many ways to pay as possible. Payment methods you can and should accept include check, check by phone, credit card, PayPal and ACH.
  8. Use invoice numbers. Now that might sound like silly advice but you would be surprised how many small businesses I’ve found that either don’t use invoice numbers, or duplicate them. It’s important to give each invoice a unique invoice number for a number of reasons.
    1. A unique invoice number will allow both you and your customer to easily find the invoice should questions arise.
    2. Some larger companies won’t be able to enter your invoice without a number, no data entry equals no payment.
    3. An invoice without an invoice number is not considered a legal document, this could be important if disputes about the invoice arise.

2. Systematize Your Collections Process

Processes and systems will improve your overall effectiveness wherever you install them in your business. With a well organized system you and your employees will spend less time thinking about what to do and more time doing it. A good system will also allow you see where you can use automation and what you can delegate.

Start with your aging

An accounts receivable aging report is easily run in virtually any decent accounting software program. If you can’t run an aging with your software you need to look into using a different program. In any case your aging will provide the status of every open invoice your company has. Your aging provides visibility into the state of your receivables by separating unpaid invoices into columns typically in 30 day increments, so you can easily identify delinquent accounts, see how late invoices are, and decide what type of action you need to take.

Next steps might include emailed payment reminders, statements or even a phone call depending on the amount of time you’ve been working on collecting the account.

Knowing where you’re at is the first step in any journey and the accounts receivable collection process is no exception. Your aging will not only tell you where you’re at now, it will inform your efforts going forward by letting you easily see which companies have overdue invoices, how late they actually are and how much each company owes. All critical information when you are determining next steps.

Document Your Efforts

We document everything and suggest you do the same. That means making note of every call you make and every email you send, whether or not you actually make contact or get a reply. If you email an invoice to accounts payable, document it. If you send a statement, document it.

How or if your customer responds will inform your efforts going forward and let you know what to do next. So be sure to note the results of your effort. If your customer was out to lunch say so, in a meeting, make note. Over time you’ll get a feel for how each customer behaves and that will allow you to tailor your efforts and improve your results.

Schedule Next Steps

The key to effective collections and accounts receivable management is the follow up. Schedule the next step ideally in a CRM that will allow you to see everything you have to do in one place.

Once you’ve sent an inquiry it’s critical that you follow up in a timely manner. Failure to follow up will render the entire system ineffective. In fact we would go so far as to say failure to follow up will train your customers to ignore you. If they know you aren’t going to send another email or leave another message why wouldn’t they just continue to avoid you. This is particularly true working with smaller companies that may have cash flow issues.

Follow up Promptly

Follow up on all requests for information or clarification promptly. It’s ineffective at best to respond to a request for an invoice copy with “I’ve already sent one” – tempting but it doesn’t work. Email the copy even if you’ve already sent it before. If you’ve had to do it several times ask to remain on the line until they receive it instead of refusing to send it.

If clarification of the invoice is needed provide it and go back to step one and work on your invoicing process. Easy to understand invoices are an easy way to avoid payment delays.

Use a CRM (Customer relationship management software)

You may be tempted, as many accounts receivable management professionals are, to simply jot your notes down on your aging or perhaps in the customers file or on a copy of the invoice. This is not a system and would be a mistake.

Your success at improving your accounts receivable collections lies in the system. With a system you can see a history of invoicing, payments and collection activity. That history will allow you to perform credit evaluations which can be critical to your receivable management success.

In summary, make sure your invoicing correctly and on time. Systematize your process. Use your aging. Document everything. Schedule next steps, don’t rely on memory. Use a CRM not random notes on your aging. Follow up promptly and completely. Take these steps and your collection efforts can’t fail to improve.




One Comments

  • arif hossen July 12, 2023

    nice post

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