Managing Receivables Pays Off

If you want to be successful in business, your customers have to pay you on time. If you’re like most businesses, you sell products on a credit basis, and then ask your customer to pay you later, such as within 30 days. During this time, you essentially lend money to the customer, and expect that you are going to be paid back. Only when the invoice is paid do you have the money you need to successfully run your business.

Unfortunately, getting the money you’re owed isn’t always as easy as just sending an invoice. Almost all businesses have customers who are slow-paying or don’t pay at all. If you’re not proactive in managing your receivables you can quickly deplete your cash. Here are some of the best practices you can implement to protect your company from late payments and delinquent accounts.

1. Make sure your customers are creditworthy. Perform credit checks and require credit applications to be completed before accepting orders. If the purchase amount is large enough, you can even ask for and review financial statements. Set credit limits and enforce them.

2. Run aging reports and review them often. These reports help you understand the makeup of your accounts receivable balance, showing which invoices are less than 30 days old, 30 to 60 days, 60 to 90 days, and so on. Make sure you or your staff knows how to interpret the reports to spot problems early on. And assign someone to follow up promptly with late payers. The older invoices get the more difficult they are to collect.

3. Mail invoices promptly. The sooner you get invoices out, the sooner payments will come in. Also make sure that your bills are clear, accurate, and detailed; the more details you include on the bill, the harder it will be for the customer to dispute your charges.

4. Reward and penalize. Implement a plan whereby you provide incentives for prompt payment and penalties for late payments. For example, you could give customers who pay within 10 days a 2% discount. You can also automatically assess a penalty fee if a customer is more than 30 days late with payment, for example. Make sure you stay within any limits set legally, so that you don’t get yourself into trouble.

5. Monitor your growth. If you have a sudden significant increase in sales, this can greatly impact your company’s receivables and cash needs. Use the advice of a seasoned professional to develop a strategy for growth. You might want to consider additional financing such as a line of credit from the bank, or consider adjusting your prices. You may need to deter growth short-term to make sure that you don’t outpace your ability to pay your own bills.

Successful companies continually seek new ways to improve their accounts receivable function because they know that improving the process can lead to significant financial gain. Fewer outstanding account balances mean fewer bad-debt write-offs and enhanced profitability. And a well-managed portfolio of receivables can boost cash flow and expand working capital.

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