Cash flow; it is the Achilles heel of too many small businesses. As the CPA for many small businesses in the Phoenix area, I’ve seen too many that are making sales and even turning a profit but run out of cash and get into trouble. One of the most overlooked ways to improve cash flow is to collect Accounts Receivable (AR) faster. I’ve put together a list of the top 7 things you can do to help you get AR cash in the door more quickly.
1. Provide customers with clear and accurate invoices. Just like any communication, invoices are a reflection of you and your business. Make sure your invoices include sufficient detail and are accurate. Make a positive impression with your invoices and don’t give customers a reason not to pay quickly.
2. Create and regularly review an AR aging report. With an AR aging report you will always know the status of client accounts and quickly see who is behind in payment as soon as their account becomes past due. Use this report to prioritize your collection efforts.
3. Make one person responsible for AR collections. You know how it works; if AR is not assigned to someone it probably won’t get done or at least not on a consistent basis. Be sure to assign AR to one of your employees, preferably a bookkeeping employee, so it doesn’t fall through the cracks.
4. Act quickly and decisively on past-due accounts. A past due AR is not the time to give customers the benefit of the doubt. Studies have shown that the longer they go uncollected, the less likely past-due accounts are to pay. Your designated AR person should start making calls the day after an account becomes past due. This is another opportunity to give customers the right impression about how you conduct your business. Most customers want to deal with a business that is paying attention to the details and running a tight ship.
5. Develop and execute your collections strategy carefully. Have a consistent collections strategy in place and then execute against that strategy. For example, step one could be a friendly reminder call and/or email. Step 2 could be a more aggressive written notice and so on.
6. Always provide options. Keeping a close watch and quickly following up on past-due accounts doesn’t mean you don’t have heart. Sometimes, good customers have short-term reasons why they are unable to pay their invoices on time. If you believe the customer is solid and is experiencing a temporary issue, you might want to give them the option of a payment plan. Of course, the agreement should be made in writing, provide the exact payment details and be signed by both parties.
7. As a last resort, hire a collection agency. If you’ve implemented all of the steps above and still haven’t received payment, you might consider turning the account over to a collection agency. No one likes this option but sometimes it is necessary. Before taking this step you’ll want to consider it carefully as it will most likely be detrimental to your relationship with the customer. Is the benefit of collecting the past-due amount greater than the risk of losing the customer? In answering that question you’ll want to consider many factors including the amount that you’ll actually receive after the collection agency takes their cut.
Make AR collections a top priority, follow the steps above and you should see improvements in your cash flow and bottom line.
If you have any questions about managing your AR, please give me a call.