Your receivables should be a number one priority for your business. In order to properly manage receivables and get paid on time, you’ve got to become a pro at the entire A/R process. The Receivables Exchange and Funding Gates have teamed together to help small businesses take control of their receivables management. In fact, here’s everything you need to know about your receivables, from A to Z.
The A-Z of Receivables Management
A – Aging Report – The accounts receivable aging report shows the amount of money owed to a company, along with the amount of time those accounts have been past due. They tend to be broken up as “current”, “0-30 days past due”, “31-60 days past due”, “61-90 days past due”, “91-120 days past due” and “over 120 days past due”. This report is important to generate so you always know what’s going on with your receivables.
B – Bankruptcy – When a client who owes you money files for bankruptcy, your first reaction might be to try to collect the money – don’t do it. You could actually violate the bankruptcy code and get sued yourself. The matter is in the hands of the court system and you will have to wait patiently for the bankruptcy proceedings to take their course. In the meantime, proceed under the assumption that you will not recover the funds and consult with your CPA about claiming the loss as a deduction on your taxes.
C – CRM – CRM is naturally associated with sales, but what most forget is that receivables management is part of the sales cycle. If you “made a sale”, it doesn’t mean anything until that check is in the mail. Therefore you should treat your accounts receivables management (ARM) as you do CRM. Make it a habit to take notes on contact with customers about payment, keeping everyone on the team in the know on where a payment stands, and allowing yourself to properly structure your collections process.
D – Days Sales Outstanding (DSO) – DSO is a small business’ best barometer for determining financial health. It is the calculation of the average number of days that it takes a company to get paid after a sale has been made (the lower the number, the healthier your cashflow). According to Sageworks, the average DSO for private companies has increased from 37.9 in January 2012 to 45.3 in January 2013.
E – Electronic Payments – If you’re not accepting electronic payments, you’re asking for customers to pay you late. In fact, a study by CashEdge shows that 72% of small business would prefer online payments. Not only does offering electronic payments incentivize your customers to pay earlier, aligning with the method in which they prefer to pay, but it also cuts out the time you have to wait for the check in the mail, immediately speeding up the cash flow cycle.
F – Financing – For those of you who are dealing with the headache of extended payment terms and slow paying customers, financing your invoices could be the cure. Improve your cash flow by turning your unpaid receivables into cash. Invoice financing companies offer an up to 90% advance on the value of your receivables and most of them specialize in financing small businesses.
G – Guarantee – Extending credit to customers is always a little risky. You never know for certain if someone is going to pay. However, there is a way to give yourself a little reassurance: receivables insurance. Accounts receivables insurance is just as it sounds: commercial insurers protect you against defaults on open accounts. You would be protected in the event that your client suddenly declares bankruptcy, goes out of business, or if, say, there’s a natural disaster that prevents payment. However, this insurance is only recommended for some, and if you’re in a high-risk industry, your premiums could be hefty.
H – Help – Sometimes, despite your best efforts, you just can’t get a customer to pay on time. If delinquent accounts are hurting your company’s bottom line, don’t be afraid to ask for help. Use a CRM for accounts receivable management tool, consult with a collections company, call your CPA, or speak with an attorney to find out what your options are.
I – Invoices – When it comes to invoices, the wording you choose to include can literally affect the time frame in which you receive the check. For example, by including a “please” or “thank you”, you can increase your chances of getting paid by over 5%. If you avoid jargon (see below) such as “net terms” and be more specific with a phrase like “14 days to pay” you’ll get paid faster, and even faster than you would by asking for immediate payment.
J – Jargon – Accounts receivable jargon is very specific and can be a foreign language to non-accounting professionals. So, when you refer to a payment advice, remittance, or net terms to an account debtor (I mean customer), they might not know what you’re talking about. Ensure your message is understood by using more commonly employed words (for example: use “payment” instead of “remittance”).
K – Keeping in Touch – Sometimes forgetting a payment is all too easy. We’ve all done it before: received a bill in the mail, got distracted, pushed it to the side, and slowly things pile up over it. That’s why it’s crucial to remind customers. Whether by giving them a call or sending them a friendly email or reminder letter in the mail, you’re helping your customers pay on time. In fact, reminder letters increase collectability rates by over 4%.
L – Late Payment Excuses – You’ve probably heard every late payment excuse in the book. Some of the toughest excuses to respond to might come from your favorite customers who are appealing to your soft side – don’t let them. It’s important to remember that you’re running a business and when someone owes you money, you have to set the precedence of politely but firmly informing them that payment is expected on time.
M – “Managing” receivables – Managing receivables is a term you probably hear a lot, but just what does it mean? The fact is, overseeing your company’s collections isn’t simple. You have to take the time to create an infrastructure that allows you to monitor, track and organize your invoices once they are sent. Luckily, there is a new app out there to make this process simple. Funding Gates, an online credit department for small business, aims to make “managing” receivables the easiest part of running your business, while serving as a CRM for your ARM.
N – Negotiate – If a customer tells you that they can’t pay on time, one strategy you can employ is to negotiate a payment plan. Though you won’t get a full payment on time, you’ll still get paid in the form of smaller amounts over a longer period of time. This helps you manage cash flow and potentially salvage a relationship with your customer.
O – Organization – Part of receivables management is making sure nothing ever falls through the cracks. It’s your job to ensure that you never discover an invoice that is 11 months overdue. Start today by implementing a structure for your collections management. How do you organize invoices once they are sent? Where do you take notes on contact with the customer about the invoice? Find a system that works for you and implement it immediately.
P – Policy – Setting up a smart credit policy is essential. You should begin by researching what the standard credit policies of your industry are. Make sure your credit policy is among the terms of sale stipulated in the purchase order or contract.
Q – Qualification – Unless trade credit is the absolute industry standard for your business, you shouldn’t be extending credit to all your customers. And even if it is the industry standard, you don’t have to do business with everyone. Having a credit application for potential customers to fill out is instrumental in the receivables process. You must do some detective work on each customer and learn about their past payment behavior to see whether or not they are a trustworthy customer. If you do more work upfront vetting the customers, you will do less work on collecting late payments in the months to come. Begin by creating a credit application that will give you all the information you need to truly qualify a customer.
R – Rewards – Though you might extend trade credit (see letter T) to your customers, the sooner you get paid, the better your cash flow will be. Incentivize your customers to pay early by offering rewards. One of the most common rewards is to offer a discount on the invoice if a customer pays within a specified period of time.
S – Software – Making sure your AR process is top notch from beginning to end means also taking into account where you’re invoicing customers from. There is a lot of great small business accounting software out there, and you should really choose the software based on what’s best for your type of small business. It’s definitely worth finding a software that lets you send both printed and online invoices, as well as allowing you to accept online payments.
T – Trade Credit – Extending trade credit is when you allow a customer extra time to pay an invoice. The most common terms are 15, 30, or 60 days. If you financially able to, extending trade credit is a great way to increase your customer’s buying power and build loyalty. If you need the cash before your customer’s payment due date, you can either finance the invoice or incentivize them to pay early with a discount.
U – Urgency – The fact is, the longer you wait to get paid, the harder it is to collect. In fact, invoices that are over 90 days past due are nearly impossible to collect. That’s why, as soon as an invoice becomes past due, you should take immediate action. Call the customer, follow up by email and a letter, and stay persistent until you receive the check, finance the invoice, or turn it over to collections.
V – Verification – Responsible business practice dictates that before you extend credit to a customer, you should first verify that they have a good credit and payment history. The easiest way to do that is to set up an account with a Business Credit Bureau. There are dozens of companies that will provide a customer’s credit history for a fee but the most well-known is Dun & Bradstreet.
W – Working Capital – In short, working capital is calculated by subtracting your current liabilities from your current assets. In other terms, how much cash do you currently have to operate? Monitoring this figure is extremely important in receivables management, as you need to know how lenient you can be with your payment terms. If you have a lot of working capital, you can extend longer terms. If your working capital is tight, you should only be operating on shorter payment terms.
X – The X-factor – When it comes to extending credit to customers, always remember that you are in control. It’s up to you to decide if and when a customer is no longer eligible for trade credit. The x-factor that you use to make a decision that is best for your business can be based on anything from payment history to a deteriorating relationship to a general gut feeling.
Y – You – When you’re managing receivables always remember this: you never have to do anything you don’t want to. You don’t have to extend credit to customer if you don’t feel right about it. This is YOUR business. YOU did the work and YOU deserve to get paid. You should never feel bad about calling a customer about a payment. It’s what you’re rightfully owed. Even if you finance an invoice or send it to a collections agency, don’t sweat it. YOU are running the show here and YOU have to do what it takes to be paid. End of story.
Z – Z-Score – A Z-Score is a calculation based upon five financial ratios that can be used to measure a company’s credit risk. A company’s receivables are included among the assets used to calculate the score. It is also used by invoice financing companies in determining the financial health of account debtors.
This article was jointly written by Mariah Courtney, Online Services Associate at the Receivables Exchange and Meredith Wood, Director of Community Relations at Funding Gates.
Find out more info on the Receivables Exchange and how to turn invoices into cash by using accounts receivable financing to generate working capital.
Find out more info on Funding Gates, the world’s first CRM for receivables management, and how to sign-up for an online credit department for your small business.