Two woman looking at a laptop.

3 ways to accelerate collection of receivables

Sunday, December 14, 2014

Quality cash flow management for customer accounts at your small business

Businesses may have booming sales; however, if a business like yours does not have an efficient collections process for collecting accounts receivable, cash flows for the business can suffer. Despite high sales volume, if cash doesn’t get deposited in your business account, then maintaining a profitable business operation can be difficult.

Moreover, there can be a ripple effect to other parts of your business; if accounts receivable is high on the aging report with low working capital, then accounts payable (paying out money to other companies for supplies or services) becomes hard to meet. Businesses could then struggle to pay other vendors or suppliers that make the business product or service possible. Accounts receivable management and concrete accounts receivable processes can support businesses to maintain optimal accounting systems and bring in cash quickly and consistently. So, this article will explore ways to accelerate the collection of receivables in order to improve overall business cash flow metrics.

To start, let’s look at what accounts receivable is.

What is accounts receivable?

Accounts receivable (A/R) can be defined as the amount of funds owed to a company for goods or services. This money is typically collected within a few weeks and is recorded as an asset on the company’s balance sheet. You use A/R as part of accrual basis accounting as opposed to cash basis. Cash basis accounting is when businesses record income and expenses only when cash is actually received or paid. On the other hand, accrual basis accounting involves tracking income and expenses as they are incurred (when an invoice is sent or a bill received) instead of when money actually changes hands.

Accounts payable is the opposite of A/R. Accounts payable is defined as the money the company owes to external parties for services. Despite the differences, A/R and accounts payable work together to form the larger picture of what is called cash flow, which is discussed in more detail later in this article.

When a customer account or invoice is in A/R, it is outstanding and not yet paid. Thus, the funds have not yet been deposited into the business account. The company can expect the money will be coming in from vendors or partners, and is often included in future cash flow projections. When a company can shorten the time an invoice remains in A/R, they minimize bad debt, past due receivables, or the possibility of late payments, and this shortened time frame to receive payments can help a business operate, grow, and expand.

Next, let’s look at how to speed up invoicing.

Speed up invoicing

With the help of A/R software, your business can focus on efforts to speed up the process of invoicing. The quicker that you can invoice, the quicker you can get cash in your business account. Businesses, especially accounting departments, often review outstanding invoices on a regular basis, so it is critical that your company has a process for how invoices are issued and paid by customers.

Here are a few strategies to consider when speeding up invoicing at your company:

  • Complete credit evaluations before agreeing to work with customers. Before agreeing to work with customers, A/R due diligence should start with reviewing the customer’s history of making timely payments according to prescribed due dates. Ensuring that customers have the capital necessary to pay for products or services will help expedite invoicing later in the process. At this time, customers could also be considered for payment plan options if they are more appropriate for that specific situation.
  • Send invoices quickly. Once a service or product has been delivered to the customer, it is important that the invoice is generated right away. As mentioned, A/R software can support this process through automation, where customers instantly receive a notification that an invoice is ready for payment. Upon delivery of the invoice, you can consider offering incentives (such as discounts) for early payment. One major benefit of accounting systems that utilize software is the automation of invoices that can be sent directly to A/R departments.
  • Define terms in writing. Having contracts signed before the delivery of a product or service can help clarify expectations for all parties involved. Contracts may indicate a specific or determined payment plan or credit terms that are offered for that specific partnership. Having a paper trail helps enforce contractual obligations for payment ahead of time. If you have issues with collection strategies, a contract can help legitimize the use of a collection agency for follow-up on payment. Considering the importance of the customer relationship, a contract can also help you work with the customer to determine the best possible payment structure for their situation.
  • Keep up-to-date on ACH metrics in real-time and receivable turnover ratios. Using software or technology that supports the tracking of receivables, your business can have a clear understanding of how quickly and to what degree receivables are being paid. With this knowledge, you can have a sense of what customers have a good track record for payment and which customers may need more follow-up to complete invoice payments.

Don’t be afraid to ask for payment

When you work with customers at your business, discussing payment should happen from the very beginning. If your business has a regular schedule for invoicing, customers should be aware of this right away and know what to expect.

Moreover, if payments are missed, customers should know what to expect in the process of seeking payment, whether discussed over a phone call or if invoice reminders will be sent digitally. In reviewing the process with customers, you are demonstrating the expectation that payment will be made, thereby reducing issues with aging receivable accounts.

Here are some other strategies for asking for payment:

  • Maintain a regular schedule for payment and delivery of invoices. In order to keep a balance sheet that ensures positive cash flows for your company, you should have a clear method and timeline for when payments are due. This will help you with analyzing financial statements and communicating with customers.
  • Utilize customer relationships when following up with overdue payments. When it comes to collection efforts, it is important to prioritize the business relationship so you can maintain consistency with your customer accounts. When negotiating payment in the case of overdue accounts, consider offering the option for credit terms or payment plans, depending on what is the best fit for the customer relationship. In some cases, you may also be able to consider write-offs for specific customer situations.

Be flexible with payment options

The easier it is to pay, the better conversion your A/R will have in completing outstanding payments. With a streamlined, straightforward process, payers will be able to complete payment on-time, making bookkeeping an easier process for your company.

Other opportunities for flexibility with payment options include:

  • Keeping payment terms short. Of course, if some customers need a longer term plan, you can negotiate, but keeping it short will reinforce a faster turnaround for payment. Even with shorter payment terms, you can offer flexibility with a range of dates for payment (for example, 7-14 business days).
  • Offer options for prepayment. Before starting a project, you may be able to explore options for a percentage of the payment to be completed ahead of time. This way, customers don’t have to worry about paying the full amount at a later date.
  • Offer multiple payment methods. Depending on the customer preference, some customers may want to pay via check or credit card while others may prefer an ACH transfer. The ability to accept a variety of payment methods will make the payment process easier for customers. With the goal of increasing your business cash flow, the more payment options, the better. If allocating some customer accounts as credit sales, then following up on payment will be even more important since terms may differ from other payment types.

Generating quality cash flow management

Cash flow management is a process for controlling the cash inflow and outflow of available cash. Cash inflow is the amount of money a business has going into it, while cash outflow is money leaving the business. Ultimately, cash flow management involves strategies that ensure payments are made on time and able to enter bank accounts or financial institutions as quickly as possible. In addition to the strategies listed above to utilize with customers, there are also important internal tools to consider when looking to accelerate the collection of receivables at your business. Let’s look at some.

Be sure to set-up an ACH account with your bank so that electronic payments can be made. These types of payments convert more quickly than checks. If customers do prefer checks as a payment method, you can offer a wholesale lockbox where checks can be delivered and deposited on behalf of the company. This shortens the length of time that checks are typically received.

Another internal strategy is to diversify your client base. Businesses can benefit in many ways when they work with customers from a wide range of business sizes because they will come with various payment methods, abilities, and processes.

Ideally, your business will be able to implement the customer facing strategies of speeding up payments, normalizing asking for payment, and offering flexibility while also incorporating internal controls for accelerated receivables.

Next steps

Are you ready to optimize accounts receivable management at your company? Are you ready to have an action plan for accounts receivables?

Heartland is ready to help.

Heartland helps nearly 1,000,000 entrepreneurs make and move money, manage employees and engage customers with human-centered technology solutions that allow them to rise above the daily grind and lead their businesses into a brighter future. Learn more at