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101 Ways to Optimize Your Receivables Management

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Think about this: 43% of small businesses have customers who are more than 90 days past due on payments. In fact, 1 in 4 of these small businesses have serious trouble collecting payments from their customers. Late paying customers are a true epidemic among small businesses and one that can cripple a small business’ ability to operate. Delinquent accounts cut into the business’ working capital and ability to properly manage their cash flow. Don’t be part of this statistic. Follow our tips below to revamp your entire  receivables management process and make collecting from customers become one of easiest parts of running your business.

 101 Ways to Optimize Your Receivables Management

- Preparing Yourself - Reminder Letters
- Credit Policy - Collection Calls
- Credit Application - Payment Methods
- Extending Credit - Using Your Receivables
- Monitoring Terms - Collection Agencies
- Getting Paid On Time - Resources

PREPARING YOURSELF FOR RECEIVABLES MANAGEMENT:

1) Know what net terms mean - If you’re company is going to sell your product or service on net terms, you first have to know what it even means. Not sure? Learn here.
2) Know extending credit is right for your company - Frankly, extending credit is not right for everyone. If your company, for example, sells cupcakes in store to customers, you won’t be operating on trade credit. Companies that work best with  receivables have products or services they can provide prior to payment.
3) Understand you have to be doing it to remain competitive - WHY do you need to be extending credit? If your competition is doing it, you need to be doing it too. And if they aren’t, use it as a way to get a leg up on your competitors. Giving your customers a chance to have more control over their cash flow is a great way to keep them coming back to you.
4) Know your risk exposure and how much your company can afford to accounts-receivable-management-1extend - The fact is, depending on your own sales, when you purchase your supplies and other factors, your company has a certain risk exposure. Know how much credit you can afford to extend.
5) Make sure you have the administrative abilities to do it well - Running a credit department is tricky. It has to be efficiently organized to be done right. Make sure you have someone on staff who can oversee it, and if it’s just you running the biz, look to employ some of the fabulous software out there than can you help with your invoicing and receivables management.
6) Know how many transactions you have and their value -  If you only have say, one customer, extending credit might not be right for you. If they don’t pay when expected you will have NO cash coming into your business. Make sure the amount and size of your transactions fit the ideal of net terms.
7) Keep an eye on your margins - To better understand your risk exposure, keep an eye on your profit margins. Generally, the larger your profit margin, the more credit you can extend.
8) Be mindful of your cash flow - You’ve heard it before: CASH IS KING. Not only do you need a decent profit margin to extend credit, but you need to have access to working capital. Excellent receivables management involves having a system that will help you keep a watchful eye on your cash flow.
9) Always know who YOU owe money to - If you are going to be expecting people to pay you back the money they owe you, you should make sure you’re also in the habit of paying people back. Always know what money you are expected to pay others, so you are prepared to have the cash coming in from your customers to allow so.

ESTABLISHING A CREDIT POLICY:

10) Learn from your competition - So how do you even know what terms to set? Check out your competition. Considering all of the factors above about your company, and if you are able to, match them. If you can, try offering even better terms.
11) Set your credit policy from the beginning - If you are going to extend credit to a customer, make sure you inform them of all the details before you begin. Think about it like this: if you’re going to play a game, you got to have rules. For proper receivables management, make sure all parties involved know what these rules are.
12) Set it in writing - Extending credit isn’t just a conversation, it’s a commitment. Get everything in writing. Leaving nothing to be questioned is key in receivables management.
13) Be systematic in your policy - In today’s world, everything is transparent. Therefore, have a system for extending credit to your customers. Use tangible figures to decide on what terms you will operate with each customer. In other words, be fair. Don’t show favoritism, because this could become public and cause you to lose customers who feel unfairly treated.
14) Be organized in your policy - Don’t just be systematic about how much credit customers get, be systematic in how they go about getting it. There is a reason it is called receivables MANAGEMENT. Implement a step-by-step process in which customers apply, are awarded terms based on the figures they provided and THEN are able to work towards better terms as their actions prove their credit.
15) Make sure your policy is visibile to all customers - As important as it is to have your policy in writing, it is even more important to have it visible. Post it on your website or somewhere where all customers can view it any time they need a reference. This will help void any “he said-she saids”.
accounts-receivable-management-216) Negotiate - Use terms as part of negotiation. Utilize it to win over your competition’s customers by offering them better terms or use it to get your customers purchasing more. Truly stellar receivables management involves understanding how enticing terms are and capitalizing on it! As JFK said “…never let us fear to negotiate.”
17) Make sure all customer facing employees know your credit policy - Another important thing to consider is the employees you have that interact with customers. Don’t let them put a hiccup in your credit policy by providing customers with wrong information. Keep them well informed with the details of your policy and make sure they have a place to consistently reference it.
18) Decide what your late payment consequences will be - Before you begin extending credit, receivables management involves making sure you know what’s going to happen if customers don’t pay you on time. Set this initially so you don’t go soft when it actually happens.
19) Warn of late payment consequences early on - Make sure to warn customers what will happen if they pay late. This will keep them from getting upset if these consequences need be applied, as they don’t feel like it came out of the blue. It also, of course, will motivate them to pay on time.
20) Decide if you want to reward early payers - Rewarding people for paying early is something some in receivables management do. Only consider this if it’s right for your business. Not only does it motivate people to pay early (therefore, on time) but it also is a great way to say thank you to your loyal customers.
21) If you do, talk about early payment rewards - If you do decide to reward early payers, make sure your customers know about these benefits. If you forget to mention it in your credit policy, you’ll lose the power to motivate on-time payers.

THE CREDIT APPLICATION:

22) Have a credit application - In receivables management, customers who want credit should apply for it. End of story.
23) Make sure the application asks for the all information you would need to pursue a late paying customer - You have two goals for your application: 1) To determine if your customer is credit worthy and 2) To gather information to pursue a possibly delinquent account. Proper receivables management involves not just using the application for evaluation but also to prepare for the worst possible scenario.
24) Ask for trade references - Now, in regards to evaluation in the credit application, make sure to ask the customer for trade references. How they behaved with past creditors is excellent information to evaluate how they will work with you.
25) Ask for bank references - Also ask the customer for bank references. If you can see how well they pay their loans and a get a feel for the financial statements, you will have a better idea of the position they are in financially.
26) Include a personal guarantee - A personal guarantee is a business owner saying that if their business defaults, they will be held personally responsible for the payments. Be sure to include this. It is a nice security blanket in case of any legal trouble you might have in the receivables management process.
27) Make it look professional - Listen, your customers aren’t going to take you seriously if you don’t take yourself seriously. Awesome receivables management is about putting your best foot forward. Make sure your application looks sharp.
28) Put it on your website - Also, make it accessible. Put your application on your website. If it is easier to access, more customers will apply.

EXTENDING CREDIT:

29) Extend the right terms to the right customers - Be smart about who gets net terms. Receivables management starts with extending only to those customers that can prove to be credit worthy, versus to all your customers.
accounts-receivable-management-1830) Consider your relationship - One great way to decide if a customer is credit worthy is to consider your relationship with them. If you’ve done consistent, loyal business with them in the past then they are certainly an excellent candidate for net terms.
31) Pull their credit report - In receivables management, if you want a sure-fire way to see if a customer is credit worthy, check their credit. Pull your customer’s BUSINESS credit report through Dun & Bradstreet or another business credit bureau.
32) Look for their credit risk rating – When trying to examine a customer’s credit, all the numbers can be overwhelming. Look for their credit risk rating, this will provide the first red flag if a customer is trouble.
33) Look for their payment history – On some biz credit reports you can also check their payment history. Having an idea of your customers’ payment behavior is a huge asset in receivables management.
34) Look for legal issues – If you can see on the report that your customer is in some sort of legal, financial trouble, you know you need to start operating IMMEDIATELY on Cash-On-Delivery terms.
35) Look for collection proceedings – Some reports show if a customer has dealt with a collection agency in the past or has any outstanding balances.
36) Looking for the company’s age – Check for how long a company has been in business. The more history they have as company, the more stable their finances will be.
37) Look at Cortera as another way to monitor their credit – If your looking for aaccounts-receivable-management-4 way to monitor your customers beyond the Business Credit Bureaus, check out Cortera, a Yelp-like review system for customers’ payment behavior.
38) If they don’t have business credit check their personal credit  - Some businesses may not even know what business credit is, let alone have any built up. If that’s the case, check the principals’ personal credit scores. How a person manages their individual finances can speak volumes as to how they will manage their business financials.
39) Check trade references - Those trade references you asked for are good for nothing if you don’t use them. Trade references should be the first thing you check, without a doubt, in receivables management. How they dealt with others on net terms is the most revealing past behavior that can speak to how they will handle your payments.
40) Check bank references - Same goes with bank references. You asked for them, now check them. Be prepared for a more lengthy process. Give yourself ample time to fill out all the required paperwork to check a customer’s bank reference.
41) Look at the customer’s cash flow - One of the easiest ways to figure a customer’s financial fitness? Check their cash flow. See how much money they have coming in versus how much they have going out. You’ll get a good idea for how they manage their finances.
42) Start on COD with all new customers - Truly responsible receivables management starts with all new customers using Cash-On-Delivery terms. Give yourself a chance to get to know your customers and how they operate.
43) Increase credit as they earn it - Excellent receivables management involves slowly increasing customers’ credit over time. Give them a chance to prove at each interval that they can be faithful with their payments.

MONITORING PAYMENT TERMS:

44) Monitor exisiting customers - You don’t just need to be checking your new customers’ credit. Being smart in receivables management means monitoring your existing customers for problems.
45) Take away net terms from exisiting customers that have red flags - Whenever you spot any red flags on a customer’s credit report, immediately stop operating on net terms with them. This is the best way to protect your cash.
46) Have an action plan for the expected red flags - Always be prepared in receivables management. In this case, prepare yourself for the possibility of having to take credit away. Make a plan for how you will alert customers and what reason you will provide.
47) Make sure employees know to flag any odd financial behavior from a customer - Receivables management is a team effort. Alert your employees to be on the lookout for any odd financial behavior or warning signs.
48) Categorize your customers - Receivables management involves staying on top of your customers who are on net terms by keeping them categorized. Find a system where you can document who is COD, who is introductory, who is standard and who has your most flexible terms.
49) Always keep customer information up to date - The worst thing is when your customer doesn’t pay on time because they never received your information (as it was sent to the wrong address). This is a rookie receivables management mistake. Always keep your customers’ information up to date so this problem is not one you encounter.
50) Keep the relationship – Never treat your receivables simply as transactions. Remember the relationship. Work on keeping it strong which helps keep the communication channels more open!
51) Send personalized holiday greetings – Strengthen those customer relationshipsaccounts-receivable-management-5 by showing them you are thinking about them during the holidays.
52) Send birthday greetings – Keep the same thought alive, and go the extra mile. Send these customers birthday greetings (if you need to get specific, send to the people you deal with directly when it comes to receivables).
53) Take note of other personal occasions – This should be a practice that doesn’t stop there. Take note of marriages, births, openings, awards and even deaths. Show your customer you are aware of them, which will encourage them to, in return, be more aware of you.
54) Stay on their radar so you’re high up on their priority list – Why is all of this important? Because receivables management is about staying heavy on their radar and more important to your customer. Don’t forget that!

GETTING PAID ON TIME:

55) Make sure your invoicing system is up to date - Having an awesome invoicingaccounts-receivable-management-16 system can sometimes make all the difference in your receivables management. Make sure your system is up to date and don’t be afraid to explore the great opportunities available for small business owners.
56) Send invoices to customers through multiple platforms - Some customers respond better to certain forms of communication and it’s hard to tell which really is the most effective. Therefore, never hesitate to mix it up. Email, call, mail and even fax invoices to your customers. They’ll see the reminder, whether through one way or all.
57) Know you deserve to be paid on time - Half the time you aren’t getting paid because you don’t completely believe that you should. Always know that is your money and you have earned it.
58) Don’t wait - In the same vein, don’t ever hesitate when pursuing late payments. The mantra of receivables management should be “the longer you wait, the harder it will be to collect.”
59) Find out why they are paying late - If you are going to try to get a late paying customer paying on time, you first need to find out why they are paying late. You have to fully understand the problem to be able to solve it.
60) Understand that some situations are forgivable - There are a few moments in your receivables management that you can forgive your customer. Sometimes they do just forget or sometimes the check was actually lost in the mail. You will know the validity of these statements by how the customers then react. If they immediately send you a check, you know they’re good for it and you can certainly give them a pass this time.
61) Stay professional  - It’s hard for moments, like when you are trying to get paid, to not get heated. But receivables management is about staying in control. If you get emotional or lose your temper it’s only going to make the process that much more difficult.
62) Put yourself in your customer’s shoes - Always first approach the customers from their perspective. Think about if you were them, how you would want to be approached about late payments. Also, consider what would motivate you to pay and utilize those tactics.
63) Keep communication professional - Whenever you communicate in regards to payment, keep it professional. Have the sharpest looking invoice, letter design and include your logo.
64) Force them to communicate – It’s impossible to get a customer paying if you can’t get through to them. If they aren’t responding to your emailed or mailed invoices, try sending a personal email that simply asks if they are receiving your information. Let them know this won’t pass without you both speaking about it.

REMINDER LETTERS:

65) Use payment reminder letters – Let’s face it, we’re human and yes we sometimes forget. Receivables management involves giving your customers a hand in remembering to pay and sending them payment reminder letters.
66) Always keep the letter language professional – Utilize language that lets your customer know you mean business, plain and simple.
67) Set different letters for different situations – What you also need to realize is that not all letters apply for all customers. Some customers,whom you know are a loyal payers, just need a friendly reminder while those consistent late paying customers need letters with more severe language. Be prepared to adjust the letter’s language depending on the situation.
68) Send multiple reminders - If you are not getting a response from your first reminder, send another and adjust the letter to consist of more severe language.
69) Consider the relationship before sending the letter – In receivables management the relationship always comes first, so think about this before sending any communication. Make sure the communication is appropriate for the relationship you have with that individual.

COLLECTION CALLS:

accounts-receivable-management-770) Know when to make a collection callCollection calls can be the most difficult part of the receivables management process because you have to face the customer head on. However, they can also be highly effective. Make sure you are using them at the most appropriate times!
71) Stay calm – To prepare yourself for the call, remain calm. The more nervous you are, the harder it will be for you to think clearly and properly handle this integral part of receivables management.
72) Practice the call beforehand – A great way to help yourself stay calm? Practice beforehand. The more prepared you are the more gracefully you can approach the situation.
73) Structure your call to make sure all your objectives are met – Not only practice, but write down the goals for your call. This will make sure you don’t forget to cover anything.
74) Get a promise from the customer before you get off – If you aren’t sure what goals to include on your outline, make sure your final goal is to get a promise from the customer that they will pay. This is the most important part of the phone call.
75) Make sure you are talking to a decision maker – One of the biggest mistakes you could be making is that you are not speaking to the right person. Make sure you are communicating with the person who has the power to send you a check. Dealing with an individual who can’t take care of this can be one of your biggest time wasters in receivables management.
76) Prepare yourself to combat the most expected customer excuses – When you’ve handled receivables management long enough, you start to hear the same excuses over and over again. Get used to these and prepare yourself for them. You can start with our list here.

PAYMENT METHODS:

77) Look into offering debit for customers – Receivables management is at times about HELPING your customers pay by making it easier for them. How? Set up ACH so they can draft money into your account.
78) Look into offering online payments – Don’t stop there, continue with the ease.accounts-receivable-management-12 Make it possible for your customers to pay online and with a credit card. This will not only make it more convenient for them but it will help you get paid faster as you don’t have to wait for the check to come in the mail.
79) Look into offering installment plans – If you want to keep with the receivables management thought of “helping your customers out” then the number one recommendation is to offer your customers the opportunity to pay the amount due in several small installments. You’ll be shocked how much more likely you are to see your money if you give customers an easier regiment to follow.
80) Structure the installment plans to meet multiple needs - The tricky part of creating installment plans is manufacturing them so they are helpful to both you and your customers. Create the plan in regards to your cash flow needs and the customer’s situation.
81) Consider adding a finance charge to motivate customers to pay – In receivables management, a smart way to motivate these customers to not waste time when putting that check in the mail is to add a finance charge for late payments. If they realize there will be financial punishment for delaying payment, they will be more likely to make sure that check is in your hands the day it is due.
82) Always alert customers in the application if you decided to add a finance charge – However, if you are going to utilize this trick, make sure the customer knows. Alert them in the credit application. Why? So they are not taken for surprise and of course, so they can ACTUALLY be motivated to pay.
83) Always have a grace period before the finance charge is applied – Don’t be overly aggressive with the finance charge. Always allow a grace period before the charge becomes effective. Why? To allow for those customers who’s check got lost in the mail or truly never received your invoice to be able to send in their payment fast. Not all your customers are looking for ways to short change you. Make room to correct honest mistakes.
84) Use the finance charge for negotiation – In receivables management, think of the finance charge as a multi-faceted tool. You can also use it to negotiate. Sometimes you can get a customer to pay immediately by removing the finance charge. If that’s the case, do so. Use it to get what you want.

USING YOUR RECEIVABLES TO YOUR ADVANTAGE:

85) Look at trade credit insurance - There is a way to protect your receivables. If you have a particular large amount, don’t be afraid to look into insuring them!
86) Look at factoring  - Did you know you can turn your receivables into cash? That’s right, you can sell them to companies who will give you actual cash for your invoices. The amount you will receive is, of course, less than the invoice total.
accounts-receivable-management-987) Look at the Receivables Exchange - If receivables factoring sounds enticing to you, but you don’t know where to start, a good place to begin is the Receivables Exchange. It’s like eBay, but for receivables.
88) Use a collection lawyer in the right situation - Sometimes you have to pull out the big guns. There a lot of different options you have and explore them all for each situation. Collection Lawyers are a good option to examine. They tend to be best for larger accounts with a continuing problem.
89) Report late paying customers to the credit bureaus - Stellar receivables management reports all customers’ payment history to the credit bureaus. You can use this reporting as a way to motivate customers to pay on time. If they know their behavior will have an impact on their credit score, they will definitely be putting you on top of their payment list.
90) Know who these bureaus are - If you are going to start reporting (which we highly recommend in receivables management), you need toaccounts-receivable-management-10 understand the difference between business credit and personal credit. Look into Dun and Bradstreet, Experian and Equifax for business credit reporting.

COLLECTION AGENCIES:

91) Send 90+ days accounts to collection agencies - In receivables management, once an account is 90 days past due, you could say it’s almost impossible to collect. These are the accounts you need to be sending to collection agencies.
92) Always pick a licensed agency - Picking the right collection agency to trust with your customers is the hardest part. To begin, make sure the agency is a licensed business (only about 5-10% are in the US).
93) Do your due diligence on the agency  - Continue the process of researching agencies by asking the right questions.  Really make sure you know all there is about a company before you agree to do business with them.
accounts-receivable-management-1394) Only use a CCAA certified agency - A good place to start is to simply check and see if an agency is a CCAA certified agency. It pretty much covers all the stops for you. How? Find out here.
95) Make sure the agency has been in business for a few years - If you choose to not pursue a CCAA certified agency, check for other important facts. For one, find out how long the agency has been in business. The longer the better, as you know they are doing good business that is bringing customers back.
96) Make sure you know how long the agency holds the collection amount before forwarding you the funds - It’s important to know how long before you’ll get your collected funds. As you always are monitoring your cash flow, you need to know how long before the collection agency will be paying you.
97) Ask how often you’ll be updated on your account - It’s also really good to get a feel for the type of communication that the agency has. The more open they are about the progress of your account, the better. Ask if you have an account manager that you will have access to. Knowing you have someone to communicate with at all times will help give you much more peace of mind.

MUST READ RECEIVABLES MANAGEMENT INFO:

98) Read “A Pro-active Approach to Credit Management”- A great way to stay on top of your receivables management is to stay informed. There are lots of wonderful resources out there, such as the work of Michelle Dunn. Check out one of our favorite books from The Collecting Money Series.
99) Become part of the Funding Gates Small Business Community - Our blog here at Funding Gates is updated every day with news to help you manage your small business finances and most importantly, to upgrade your receivables management. Subscribe or simply check back in!
100) Enroll in an receivables management boot camp- We have some great material that goes even more in depth about receivables management. You can enroll in our Extending Net Terms Like a Pro Boot Camp or Managing Late Paying Customers Boot Camp and go through a 2 week, step-by-step transformation of your entire credit and collections process.
101) Lastly, subscribe with us! - Soon we will launching more products to help you
take complete control over your receivables management. Subscribe here for a chance to experience our platform, the first ever credit department for small businesses, automating your entire receivables process.

 

 

101 may seem like a lot, but we know there are more ways out there to optimize accounts receivable management. What has been the most effective trick for you?

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2 Responses to 101 Ways to Optimize Your Receivables Management

  1. Joe Cape says:

    This is an excellent post. A virtual “hand book” for small businesses. I recommend you turn it into an ebook that small businesses can buy or for free. Thank you for this excellent post. I enjoyed it very much!_!
    Joe Cape/Cape-Able Consultants/614-725-4799/970-689-4305 http://www.cape-ableconsultants.com

  2. meredithawood says:

    Thanks for the kind words Joe! And that’s a really great idea! Come visit us again soon. We love getting feedback!

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