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Sep
11

4 Easy Steps to Collecting your Accounts Receivables

All small business owners and entrepreneurs know cash is king. You need cash to run your business. Whether it’s ordering inventory, purchasing supplies, paying payroll, covering your utilities, investing back in your business, and paying yourself. I was shocked to read an article from the AICPA’s blog about a survey conducted by SageWorks. The survey found that the typical small business has at least 40% of their assets tied up in Accounts Receivable. Wow, that’s a lot of financing to their customers! Here are 4 easy steps to collect your accounts receivable quickly.

  1. Be In Touch With Your Customers
    Don’t be afraid to pick up the phone and contact your customers. A simple and friendly call to remind them about their outstanding invoices can go a long way. Another great way to remind customers of their past due balances is to send monthly statements. I recommend sending monthly past due statements at the beginning of every month. Add it as a task to your calendar and stick to it. Then the customers who are still outstanding by the middle of the month, give them a call. It’s a lot easier to collect newer receivables than the older ones. So being in touch with your customers sooner than later will almost always pay off.
  2. Take a Look at Your Accounts Receivable Policy
    • Not all of your customers are the same. Yes, if you are working with large corporations, it typically takes the standard 30-45 days for them to issue payment. If you work with smaller companies, try adjusting the payment terms. Is it possible to have your invoices due within 10 days, 20 days, upon receipt, etc?
    • What about charging a retainer payment – your customer pays half up front and the other half when you deliver the product or service.
    • Another great option is offering prepayment discounts. Many times you will see invoices with 5% discount if paid before 30 days. There are a lot of small businesses out there that love reaping the benefits of paying early to get discounts. Why not entice them to pay your bill early too!
    • Contact your bank and get set up to accept automatic draft payments or credit card payments. You can sign your customers up to have their monthly fees be directly debited from their bank account on the 1st of each month or you can automatically charge their credit card the 1st of each month (or whatever day you choose).
    • Don’t be afraid to charge late fees. Keep in mind some states have credit laws, so you need to make sure your financing fees are in line with the state and federal laws. Typically you need to have the late fees spelled out in your contract and listed on your invoices. That way there are no surprises to your delinquent customers.
  3. Not Everyone Has To Be Your Customer
    Don’t be afraid to turn away customers that you get a bad gut feeling about. Maybe you know the potential customer doesn’t have the funds to pay or maybe you’ve done this type of work in the past and have been stiffed more times than you would like to admit. If it doesn’t feel right, it probably is not. Why waste your time and resources doing work when you do not think you will get paid. Instead, kindly turn down the work. If you really want to do the work, make sure you collect the payment up front.
  4. Double Check Your Invoices
    Don’t forget to double check the invoices you send to your customers. Set up a procedure to have them looked over before sending or a few weeks after they have been sent, if payment has not been received. I know I’m guilty of this too, taking longer to pay on incorrect invoices. We are all busy, but don’t make your customer have to make time to correct your billing mistakes. This will almost always result in a delay in you getting paid.

These 4 easy steps should make collecting your past due invoices easier and quicker. Bottom line, being active and managing your accounts receivable will help turn those late payments into cash in your bank account. Eventually word will get out that your business does not mess around with accounts receivable and your customers will start a habit of paying you on time, if not early!

Want to watch the video blog version? Check it out here!

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Michelle Edwards, CPA - QuickBooks Consultant Written by Michelle Edwards, CPA
Certified QuickBooks ProAdvisor

Michelle Edwards, CPA is the owner of Trailhead Accounting Solutions CPA, LLC, an Erie, CO based CPA firm focused on providing small and mid-sized businesses with day-to-day accounting, bookkeeping, and Virtual CFO solutions. Michelle is a CFO turned consultant who loves working with small businesses and entrepreneurs. When she’s not crunching numbers, she can be found hiking, remote camping, gardening, home brewing, quilting, and hanging out with her family.


4 comments

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  1. Dana Caffrey says:

    I have a very small cosmetics business. In order to sold them out, I allow them to pay me in installments. There are some who really pays regularly and there are some who don’t. I agree with your Number 3 tip: I should’ve chosen the people whom I think will be good payor rather than good buyers.

    1. Michelle Edwards, CPA says:

      Hi Dana,

      Thanks for your comment. Installment payments are a great way to do business with customers who could not normally afford to do business with you. However, I agree, it’s tough to figure out which ones will pay and which ones you will get burned on. It never hurts to turn business away, especially when you don’t think they will pay for your services.

      Michelle

  2. Nikki says:

    So far I’ve only had one client to skip out on paying an invoice. I can imagine having to become a lot more choosey about the people I work with as I grow my business – a marketing communications firm. Your article really did list simple steps to take. A lot more so than many of the blogs I’ve visited claiming to offer insight on how to control cash flow. But if you don’t have a problem getting clients to pay in the first place, you’ll have the cash on hand to handle daily expenses without having to set up an elaborate strategy to chase down accounts receivables. First things first, right?

    Thanks for posting :)

    1. Michelle Edwards, CPA says:

      Thanks for your great insight, Nikki! I agree, if you don’t have troubles with collecting receivables, you probably already have a good system already in place. :)

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