Last updated by
March 1, 2021
Having accounts receivable paid on time means that the business can continue its operations without any financial hiccups.
Accounts receivable is money or payment owed to a business by customers who received goods or services with an agreement to make payments within a stated time. For instance, a business can offer goods worth $2,000 to a client who promises to pay for them within 30 days. Many companies opt to include this option for purchasing goods and services to boost sales and promote growth. However, with this approach comes the increased responsibility to track and collect these accounts receivables.
Accounts receivable collection involves the business sending invoices to its clients to claim payment for goods or services provided. In some cases, the clients may delay making payments, which is likely to put the company in a lot of financial stress, and may lead to its failure. This is why it's crucial for a business to improve its accounts receivable collection to ensure cash flow received in a timely manner.
Having accounts receivable paid on time means that the business can continue its operations without any financial hiccups. Knowing the methods to improve accounts receivable collection is the first step.
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How do you handle your accounts receivable process? Most small and medium-sized enterprises go about this manually. Or, you might be managing your accounts receivable using outdated software. Either way, one sure way to improve collection is to implement a good accounts receivable software to improve the efficiency at which you collect your accounts receivables.
Using first-class software will allow you to have better insights into the progress of your collection process. This includes keeping you updated on the number of invoices sent out, how many clients have viewed the invoices, which invoices have been paid, and those still pending. These will quicken the collection of your accounts receivable.
Today’s software is all online, it is inexpensive to use and travels well, meaning you can access it no matter where you are in the world. If you are a small business you might consider Xero.com at $30 a month the improved efficiency will more than pay for the cost.
As a business dealing in accounts receivable, you can improve collection by working out the most favorable payment terms when negotiating with the clients. As you do this, keep in mind that you still need to maintain good business relations with your clients; but you should also offer them flexibility. This is because being very strict with terms can make even your long-term clients desert you as they are also looking out for their well-being.
Rather than stating penalties for late payments, you can offer discounts for early payments. Consider your business's financial position and how much accounts receivable burden it can handle, and how long it can stay afloat if customers delay or default payments. Only give payment terms that are within the financial means of your business.
How do you go about communicating with your clients when collecting accounts receivable? Think about this, as it can significantly impact how effective you are at collecting accounts receivables. Effective communication with clients to improve your accounts receivable collection seems the most important step.
Firstly, you should not bombard your clients with emails and calls about making payments and your messages should not be threatening. However, implementing a collection process is critical. This procedure should include sending past due notices for 30, 60, and 90+ days past due. And it should include targeted phone calls. The biggest failure small businesses have is not following up on past due invoices. Frequency is negotiable but having a procedure and a person responsible is important.
In some cases, clients have genuine reasons for not making payments, so give them the benefit of the doubt, by even renegotiating payment terms. Make sure that they understand that your business also needs the money to stay afloat. That's why you have been forced to make a payment request, and you value your business relationship.
Your accounts receivable collection will be more successful if you create a collection plan. This collection plan should account for those who pay early, those who delay, and those who default. The primary purpose of the collection plan is to collect the accounts receivable within the shortest time possible.
The collection plan should include offering a reminder call or email to customers about 10 days before the due date for payment. Additionally, include some depreciating discount for customers who pay early.
If the customer cannot make the full payment on the due date, you can allow them to pay in two instalments. The first instalment should be before the due date, and then you can offer them some additional time, depending on what's favorable to you for them to make payments.
Keeping records of your interactions with customers will significantly improve your success in accounts receivable collection. This is because you will have evidence to support your payment claim when you next interact with the customer, especially when subjected to delays. You can remind them that last time they had promised to make their payment on a particular date. This would push the customer to make payments sooner.
This step is greatly supported by having an accounts receivable software. Usually the software offers note sections to document such details.
Some clients may still fail to honor your accounts receivable collection request even after offering them generous extensions. You might consider taking legal action or other drastic measures that might be more resource-demanding in such an instance.
Rather than taking that route, you can change the term of payment so that the clients can pay back an agreed amount every month. Though it will take longer for you to receive the full payment, it will be better than nothing at all. Make sure as you change the payment terms, you take a payment option where the clients settle their invoices in under one year.
Legal action makes sense only on large balances. Often the cost to litigate will far exceed any small receivable amount owing. Consider all options before taking this course of action.
You might be having challenges with your accounts receivable collection because you don't have the resources to facilitate it. In such a case, it would be best for you to hire a collection agency.
Moreover, a recent study revealed that businesses that use internal systems to collect their accounts receivable often have their clients offer numerous excuses and end up dealing with delayed payments. If you are in this situation too, it would be wise for you to hire a collection agency to improve your accounts receivable collection. Using a collection agency has the additional benefit of minimizing the chances of you ruining your relationship with clients.