AR Tips for Small Business Owners

Amy Pattinson
August 4, 2022
 Mins Read

Efficient management of cash flow is one of the key stepping-stones for the success of a business enterprise. A smooth and uninterrupted cash flow is what ensures on-time payments for the company’s employees, suppliers, owners, vendors and thus, the viability of the business. Therefore, a robust system needs to be in place to ensure that there is a constant flow of money into a business enterprise. However, it is easier said than done. Not all businesses are successful in collecting the payment for the products and services they provide, which leads to cash flow becoming stagnant resulting in an unfavorable increase in the accounts receivable.

In most businesses, the establishment of accounts receivable is inevitable and the only way to manage it is by ensuring that it is minimized, by making sure that they receive the payments that are due as soon as possible. The profitability of a business can be easily gauged by looking at the accounts receivable and most importantly, this gives a clear picture regarding the income of the business. F and A outsourcing services experts can provide you that expert assistance needed for managing your AR.

Moreover, since they represent the money that comes into the company, they can be considered as an asset. With a large number of small businesses facing shortage of cash flow and finding it difficult to pay their bills, it becomes extremely important for them to manage accounts receivables more effectively.

AR Tips for Small Business Owners

Here are some tips to manage accounts receivables:

1. Get Organized:

Any business which wants to excel at managing the accounts receivables has to start right from the beginning. The process must be handled meticulously and importance must be paid to the eligibility requirement for credit. Not everyone should be allowed eligibility. The customer’s information must be gathered through a professional credit application and this must be utilized for making sound credit decisions. Once a decision is made to provide a customer with credit, they must be made to sign a contract which clearly states the operating terms. Having high quality invoicing software can go a long way in helping businesses keep an eagle’s eye  on the accounts receivables and  deliver accurate invoices on a timely basis to the customers.

2. Take Advantage of Credit Limit:

Businesses themselves are in control of the credit limit and therefore must take advantage of it. The Atradius Payment Practices Barometer, Sept 2014 found that only around 50% of businesses check the credit worthiness of customers. You must extend moderate terms to customers initially; once you have evaluated the payment habits of the customer over a period, flexible terms can be extended. This provides an opportunity for both the parties to make sure that they are clear on the terms of payment. This is one of the most effective methods of ensuring the right payment behavior.

3. Communicate:

A critical factor that contributes to successful accounts receivable management is effective communication with customers. Regular communication between the customer and yourself can go a long way in ensuring that payments are made on time. The Atradius Payment Practices Barometer, Sept 2014 found that 33% of businesses found it difficult to maintain sufficient cash flow thus hampering their profit margin. Businesses must be creative in the way they connect with their clients. Various mediums of connecting with the clients must be explored to foster a relationship that goes beyond business. Remember the customer’s special days such as anniversaries and birthdays to build trust and ensure that payments are made on time.

4. Multiple Payment Options:

When customers are given the option of making payments only by cash or check, the clearing the accounts receivable becomes largely dependent on the budget of the customer. Furthermore, an opportunity to serve paying customers is completely lost. A study conducted by Community Merchants USA has found that close to 70% of people between the age group of 18-34 preferred to do business with a company that accepted credit cards. Customers must be given the option to make payments through multiple channels such as electronic fund transfer, debit/credit card or PayPal to ensure safe and instant transfer of funds without you having to wait for the collection of account receivables.

5. Use Professional Invoices:

The invoice for the product sold or service rendered must be as specific as possible. The date, time, tax amount and the details of services provided must be clearly visible. The invoice must clearly include the due amount and due date. An additional section can be included to state the amount if paid past the due date. The level of attention an invoice receives is highly dependent on the way the invoice is presented. The template of the invoice must be designed in such a way that the customers must be able to view all the details without missing out any of them. Do not forget to include a message thanking the customers for their business as this gives that friendly touch to the invoice.

6. Send Reminders:

On rare occasions, customers might not remember that a payment is due and businesses need to send out reminders to them. The reminder call or letter must utilize professional language that is appropriate to the situation. Sending the letter or making the reminder call must be initiated only after the due date. For a customer who constantly defaults on payments, the severity of the tone of letter can be kept high whereas for first timers, the tone of the letter or the call can be kept friendly and gentle. A Sunderland Global study has found that around 26% of invoices, that are 3 months due, are not collectible and the percentage increases to 90% if the invoices are 12 months old. Once a letter is sent, a written confirmation, the response of which can be kept for future reference, can be taken from the client regarding the specific payment date.

7. Document Everything:

Accurate documentation of all account receivables is extremely necessary as it helps the bookkeeper of the business in preparing weekly and monthly financial statements as well as for the accountant for the payment of tax. Right from the beginning, documentation regarding first contact, order details, shipments, if any and, agreed-upon terms and conversations must be kept in order to avoid any future misunderstandings.

8. The Last Resort- Collection Agencies:

Collection agencies must be used only as a last resort because a business can be built only by working personally with people rather than involving a third party. This tactic must be resorted to only if it becomes quite obvious that the client is not going to make the payment.

The financial health of a business is dictated by the account receivable processes. All clients may not make the payments on time but the percentage of such defaults can be mitigated by following these tips for timely collection of payments. In the end, the goal of any small business is to make a profit. Attention to accounts receivable management will assuredly contribute to that goal. Leveraging the expertise of an expert.

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