Offering credit to customers is an important part of most companies’ business model, as it encourages sales while helping buyers to optimize their cash flow. But if you are unable to eventually collect that revenue in a complete and timely manner, it can quickly become a powerful drag on your own cash flow and future growth. Designing, implementing, and maintaining an effective AR management system should therefore be a key focus of your business plan. Here are some tips on how to develop or improve yours.
SETTING YOUR MAIN GOALS
An effective AR management plan should have three main goals.
First and foremost, you need a precise, detailed bookkeeping system that keeps track of everything you are owed. This seems obvious, of course, but a surprising number of businesses suffer from disorganized record keeping that can result in inaccurate numbers, wasted time searching for sales information, or even total loss of revenue from some sales due to an inability to substantiate them.
Second, you need a reliable billing system to “ask for” your money in a timely manner, remind customers who are late, and ultimately, a plan to recover part or all of that revenue if a customer is unable or unwilling to pay.
Third, you need to keep your paying customers happy. While the billing and collections process is a normal part of the seller and buyer relationship, sometimes it can be fraught with miscommunication and misunderstandings that can hurt feelings and damage relationships that are otherwise productive for both parties. Your AR management plan should seek to preempt those situations where possible.
PUTTING YOUR PLAN INTO ACTION
Every business and every industry will have specific needs and demands for their AR management planning, but there are several key steps that are almost universal:
Have a reliable system for assessing creditworthiness. It can be tempting to hope for the best when a sale can be made, but it will be more trouble than it’s worth if you engage with a customer that can’t or won’t pay. It impacts your cash flow, it impacts your profits, and it wastes your time. Have a system in place to investigate the creditworthiness of every potential customer and stick to it. If your budget allows for it, employ a third party with expertise, and do not hesitate to insist on cash on delivery if necessary.
Record the details of sales immediately. This has become ever easier with the development of digital order and recordkeeping software, so if you are not already using such apps or software to book sales, and/or using digital devices to make off-site sales, seriously consider making the investment. And if you are still using physical methods like receipts, invoices, and check payments, consider using a scanner to immediately record them and ensure they are available and searchable.
Know what details are important to track. Beyond simply knowing who owes what, keeping track of other key details can allow management or your bookkeeper to produce reports and key metrics or KPIs that provide insights into the health and future growth possibilities for your business.
Invoice promptly. The faster you “ask” for your money, the faster your customer can give it to you. Digital software can invoice instantly, if desired, or in any case as promptly as you’d like. Physical invoicing should be done daily if at all possible.
Automate where feasible. Manual entry is always prone to human error. The more places you can automate parts of your system, the fewer errors will creep into the process through keying mistakes, forgetfulness, or time pressures.
Remind promptly. Your customers are human. They forget. They procrastinate. Your AR management system should remind you promptly that a payment is due or past due, and then have an easy system to remind them promptly as well.
Centralize your reminder system. Nothing can irritate a customer more than feeling hounded for payment. You may have several employees who communicate with customers for various reasons – salespeople, billing people, and technicians, for example – so have a system in place to ensure they are not all being told to remind customers of payments due.
Know your customers’ cash flow needs. Ask your customers what kind of payment schedule suits their needs. What day of the month is best for them to pay your invoice? Do they prefer weekly or monthly billing for multiple purchases? Try to work these details into your own cash management cycle as best you can, and you are more likely to get paid on time.
Make it easy for your customers to pay. If you only provide limited payment options, customers may find it inconvenient to take action and pay on time. Ask your customers what methods they prefer and then make them available.
It is not an exaggeration to say that effective accounts receivable management can make or break a business. Providing products without obtaining payment is unsustainable. By having a reliable system in place that tracks and reminds customers of their obligations while also keeping their own needs in mind, you can maintain your cash flow, pay your own obligations, realize your profit goals, and chart a path for growth in the future.
If you’re ready to work on making the most of your AR management, BKE can help. We’ll provide you with a team of bookkeepers with expertise in your industry to make sure you get the most out of all the work you do. Schedule your call today.