This article is part of a larger series on Bookkeeping.
Maintaining an effective accounts receivable (A/R) management system is important duty of the bookkeeper that can help your business grow even if you expose yourself to the risks of selling goods and services on account. Creating an efficient A/R management process can be made easier by following some well-established practices—and we’ll take a look at 10, from sending invoices and utilizing sales orders to using invoicing software and monitoring A/R efficiency.
1. Send Invoices Within 48 Hours
A sales or service invoice is an official document that requests payment from the customer. While you can request payment orally, issuing a formal invoice is better in case of future disagreements. Whenever possible, you should send your invoice within 48 hours after finishing work or delivering the goods. By sending invoices immediately, customers are likely to pay quickly since the service or product is still fresh in their minds.
2. Personalize Invoices
Personalized invoices add aesthetic value to the invoice. However, adding your brand’s colors and design help your invoices stand out and promote your company. If customers can identify your invoices easily, they can also remember it easily and pay it as early as possible. Browse our 10 examples of great-looking invoices for inspiration in designing your unique invoice.
3. Have a Formal Credit Policy
A credit policy is a form of control that protects your business from customers who don’t pay on time. Before you extend credit to customers, they must undergo a strict and formal vetting process. You must set requirements, terms, and conditions that would identify the good debtors.
For example, you can set maximum credit limits to put a ceiling to the amount of purchases they can make on account. Along the way, you can increase credit limits based on the customer’s payment patterns.
4. Act Swiftly When Customers Miss a Payment Deadline
When a customer misses a payment, you should give them the benefit of the doubt, but don’t be complacent. Generate an aging of accounts receivable report at least once a week to monitor the accounts that will come due or have become due.
If an account is past due even just for a day, contact the customer immediately to discuss it with them. Collecting from slow-paying customers is an unpleasant task, but it only becomes worse the longer you wait. Oftentimes, missed payments can be resolved quickly with a timely phone call.
In case the customer isn’t responding to your calls, you can send a collection letter by mail or email within 48 hours, whichever your customer prefers. In QuickBooks Online, there’s an option wherein it will send a payment reminder to the customer automatically if their account has been due after a specified number of days.
5. Utilize Sales Orders to Manage Orders Efficiently
Sales orders help your employees check if the products awaiting shipment match the details and specifications of the customer’s order. Checking the sales order during order fulfillment helps prevent mistakes in preparing the goods for shipment.
6. Use Invoicing Software
Using an invoicing software not only makes it quick and easy to create, send, and monitor invoices but reduces your workload. You can check our list of the best invoicing software for small businesses—some of these are free, so you might want to start with those to get a grasp of how the platforms work.
7. Integrate A/R With Accounting Software
Be sure that whatever software you use to track and record A/R payments is integrated with the software that records deposits and reconciles your bank account. This will ensure that the A/R payments received agree with the checks deposited in the bank account. QuickBooks Online can handle both of these crucial functions.
8. Segregate A/R Duties
One person should issue invoices and another should receive checks and apply them to outstanding invoices. In very small companies with only one bookkeeper, the owner should review all incoming checks and compare them to outstanding invoices before giving them to the bookkeeper.
9. Address Customer Concerns
The primary reason customers don’t pay on time is because they aren’t satisfied with the service or product provided. Have a system in place to address their concerns by putting them in touch with the proper person, preferably not your A/R clerk as they may be ineffective since they generally aren’t involved in that part of the business. Client concerns need to be dealt with before any collection calls.
10. Monitor A/R Efficiency
Use the A/R turnover ratio, the number of times you convert A/R into cash, to evaluate how effective your business is at quickly collecting A/R. Assume the A/R turnover during 2021 is 3.5. It means that we’ve collected A/R 3.5 times during the year. However, in 2022, the A/R turnover is 2.5. A higher A/R turnover is better, so we can say that the time to collect our A/R was worse in 2021 as compared to 2022. You should track how the turnover ratio changes over time as you implement new policies and procedures.
What Is Accounts Receivable Management?
A/R management is the process of extending credit to customers, issuing accurate invoices, and collecting timely payments from customers. It’s a set of policies and procedures that a company follows to manage credit sales. Managing A/R starts with credit evaluation and ends with the collection process.
A sound A/R management system should have a uniform credit standard, industry-appropriate credit term, and collection program.
Uniform Credit Standard
A credit standard is a set of procedures used to evaluate the creditworthiness of a customer. It answers the questions, “which customer should be granted credit?” and “how much is the limit?” You should also consider the 5 C’s of credit to determine if the customer passes the minimum criteria you set. Applying a uniform credit standard can avoid future problems with customers claiming they’re treated unfairly.
Industry-appropriate Credit Term
A credit or payment term usually has two components. The first is the cash discount, wherein you give a special discount to induce prompt payment. The second is the due date or the last day of the credit term.
For example, you gave a customer a credit term of n/30. This term means that the customer can pay within 30 days or on the 30th day. In this case, some customers will maximize the credit term since there’s no reward for paying early. Hence, you can try adding an early payment discount to induce prompt payment. A term of 2/10, n/30 looks attractive since customers might want to get two percent off if they pay within 10 days.
Be sure to consider payment terms that are being offered by your competitors so that you don’t lose sales by not offering a small discount. Also consider the payment terms given to you by your vendors. It might be difficult to offer your customers n/30 if your vendors are demanding you pay in 15 days (n/15).
An effective collection program will help you collect faster, providing you cash for other business needs. Collection programs involve sending periodic statements of accounts, calling customers to remind them of their outstanding invoices, sending collection letters, and hiring a debt collector or filing a collection suit as remedies of last resort.
Aside from reducing the age of receivables, a sound collection program also reduces risk of default. If customers pay on time or earlier, you can utilize the cash payment to replenish stocks or settle trade payables. Collecting faster and earlier reduces the risk of defaults and losses due to bad debts.
Managing A/R is challenging without a solid process to help you efficiently manage A/R transactions. Poor A/R management can lead to slow-paying customers and a lack of cash when you need it. With our accounts receivable best practices, you can improve your credit granting and collection process and serve your customers even better.