As a small business owner, you likely know that cash flow management is essential for your company’s long-term survival. You may not realize, however, that improperly managed accounts receivable is one of the most common causes of cash flow shortages.
According to a recent study, one in four small businesses struggles to collect payments from clients, while a shocking 43% have current invoices that are more than 90 days past due. In the long run, companies that can’t collect payment from their customers are forced to draw from their cash reserves or seek outside financing to make ends meet. As a result, owners have less cash on hand to manage operations, pay employees and ultimately grow their businesses.
While collection problems are clearly commonplace among small businesses, owners don’t have to suffer delinquent accounts in silence. There are steps a firm can take to better manage its accounts receivable and increase overall cash flow. Here are 7 effective ways to improve your accounts receivable by getting paid faster.
1. Go Electronic
If you want to expedite the invoicing process, consider sending bills via email, using an email invoice template, instead of the U.S. Postal Service. While snail mail can cause your invoices to be delayed by several days, email ensures they reach the requisite party immediately. Just be sure to confirm your clients’ email addresses ahead of time, as you don’t want to complain about late payments on invoices that your customers never received.
2. Reduce Payment Terms
Reducing payment terms is one motivator, but it works even better if you do it with email. One of the many benefits of invoicing via email is that it allows companies to reduce their payment terms. Because of the delays that accompany paper mail, businesses used to allow 30 days or more for payment. However, the immediacy of email invoicing means that businesses can now specify that payment be due upon receipt rather than allowing for net 30 billing.
As a result, you can collect on bills faster, ensuring sufficient cash flow for the coming weeks. Additionally, you should send your invoices as soon as a project is completed rather than waiting until the end of the monthly billing cycles. This helps keep work “fresh” in clients’ minds.
3. Maintain a Healthy Work Relationship
Happy customers are more likely to pay their bills on time. In the event that a customer is short on cash, he will likely prioritize those companies with whom he has a positive relationship over the ones that regularly underperform. If you want to avoid late collections, strive to fulfill your obligations and develop strong working relationships with all your business clients. Just making a few personal calls to the payment departments can ensure you never wait on a late invoice again.
4. Offer Multiple Payment Methods
If you want to get paid on time, then give your customers as many options as possible to satisfy their debts. While sending a check each month is still commonplace, some clients may prefer to pay invoices via PayPal or credit card.
Additionally, you may want to consider utilizing electronic funds transfer (ETF), which allows customers to transfer payments from their bank accounts to yours for a fee, provided they have your bank name and account number. You may want to include this information on your invoice to make EFT an easy option for paying bills.
5. Consider Hiring an Accounting Company
Managing your accounts receivable can take up a great deal of time and energy. One option for reducing workload while boosting cash flow is to hire an accounting company to handle your finances. By turning your accounts receivable management over to another firm, you can focus on what matters: running your business.
6. Set Clear Credit Policies
If you’ve worked with a customer for years, you may be tempted to offer a credit on your products and services. Extending too much credit, however, can take a serious toll on your accounts receivable. Before setting up a credit account, check a business’ credit history to ensure it has a record of paying bills on time. Additionally, you should set up clear terms and inform your clients of all the details before any agreements are made.
7. Make Collections a Last Resort
Still waiting for a client to make good on his bill? While you may be tempted to turn over unpaid invoices to a collections agency, it’s best to use this option as a last resort. After all, handing over accounts to collections can result in significant financial costs along with lost business. Before going this route, call the client personally and make one final appeal for payment.
The fact is that cash flow is a crucial element of overall financial performance. Managing your accounts receivable well doesn’t just keep your business running smoothly from day to day; it also helps ensure a long and profitable future for your company.
Keeping your accounts receivable up-to-date is crucial, but it’s not the only part of successfully managing your business’ accounting needs. To help you form a broader picture of what’s required, here are 21 small business accounting basics you should know.