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  • Posted by: Dante Odoni
How to Speed Up Collections of Accounts Receivable - Odoni Partners LLC - Certified Public Accountants

How to Speed Up Collections of Accounts Receivable

One of the top killers of small businesses is anemic cash flow. If many or most of your sales are on credit, your P&L might look great, but if you aren’t collecting what you’re owed, you can soon find yourself unable to meet large critical disbursements like payroll, taxes, or supplier payments. Landing in trouble with your employees, the government or a vital vendor (or worse, all of the above) is a quick path to insolvency.

There are plenty of ways to speed up collections of accounts receivable. We don’t have the space to cover all of them, but here are some of the most important.

Not Everyone Gets Credit

It’s so easy — especially in the early days of a business — to be generous in extending credit. You want to make sales, right? Easy credit terms may well help give you the edge that you need over competitors.

No one would deny that extending credit is important, especially in business-to-business (B2B) industries where, frankly, it’s just expected. However, there are two things that are important to keep in mind from the outset.

First, there is a reason lenders and vendors perform credit checks. Some individuals are less risky credit-wise than others, and businesses are no different. Unfortunately, credit reporting practices in the business world are less standardized than in the consumer sector, the venerable Dun & Bradstreet notwithstanding. A standard credit check is useful and should be performed, but don’t stop there.

Ask for two or three credit references, and then actually make those phone calls. If what you learn gives you pause, don’t be afraid to start that customer out with a low credit limit or even to deny credit altogether. Yes, you could lose the customer, but really, how much good is one who doesn’t pay?

Second, keep in mind that you are setting a tone and creating expectations in the early days of your business. Setting firm but fair credit standards beginning with your very first customer is much easier than trying to reign in overly generous practices later and risk souring relations with existing customers.

Invoice Promptly

Yes, it seems like a no-brainer, but send your invoices promptly — not necessarily every day, but at least twice a week. It’s easy to get caught up in the excitement of making sales, especially if selling is your greatest skill as a business owner, but getting invoices out to your customers quickly accomplishes a couple of things.

First, few businesses issue payments every day — and larger businesses definitely don’t. Instead, they have a payables cycle in which invoices are received, processed, booked, and — eventually — paid. Payments may only go out once a week, or even every other week. The sooner you get your invoice in line, the sooner you are likely to be paid.

Second, prompt invoicing sends a message: “We’re on top of our business, and getting paid is important to us.” If you’re lax about issuing invoices, it can give the impression that you’re not really worried about (or at least paying attention to) getting paid. If getting paid isn’t a priority for you, why should paying you be a priority for your customers?

Penalties and Discounts

Be honest: If there were no speed limits, how fast would you drive? Almost certainly faster than 55 or 70 or whatever the local limit is, and probably faster than would really be safe. Most of us regulate our speed because we don’t want the expense of a ticket (and what it does to our insurance rates).

Your customers are no different. If they can get away with paying 10 or 15 or 30 days late, when push comes to shove (as in they have to decide which bills get paid and which ones wait), they’re going to take advantage of that.

However, if you establish late payment penalties (and you fairly and consistently apply them), you will establish the expectation that timely payment matters to you. Your company will never make the “who can we pay late and get away with it” list. However, it’s important to determine any legal limits on late fees and/or interest charges imposed by your state’s laws.

It’s not particularly nice to wave sticks around without also offering carrots, so early payment discounts are another great tool to speed up receivables collections. A 2/10 discount (2% if paid within 10 days of the invoice date) is very common. You won’t miss the discount — especially not if you build a small allowance for it into your pricing.

Make Paying Easy

If there is one factor that has contributed to Amazon’s success as a retailer other than its pricing, it’s how easy Amazon makes buying. One-Click in hindsight seems so obvious, yet it wasn’t until Jeff Bezos and Company came along. Now you don’t even have to click; just ask Alexa. You can borrow a page from Mr. Bezos in your own business.

The more methods for payment that you offer your customers, the more likely you’ll get paid quickly. Sure, some companies still cut paper checks, but ACH credit and credit and purchasing card payments are much more common. Establish merchant accounts to accept credit cards as part of your business startup. Most accounting packages make it possible to send an electronic invoice with an embedded payment link. For larger clients, see whether they would like to pay by ACH credit to your business account.

Stay on Top of Receivables

Much like invoicing promptly, closely managing your receivables seems obvious, but all too often, it doesn’t happen as it should. Frankly, making collection calls is not exactly a dream job, but tardy customers have to be followed up. Designate someone in your company — ideally someone who has both the temperament for and experience with collections — to handle that responsibility.

It’s important to understand that collections don’t need to be — in fact, shouldn’t be — a nasty business. Companies run into problems sometimes just like people do, and it’s silly to lose a long-term customer over the methods used to collect a delinquent invoice or two. “Firm but fair” should be the mantra here; be polite, be understanding, but be firm when it comes time to draw the line.

You may occasionally have to offer extended payment terms or make other accommodations for customer-facing difficulties, and doing so can result in an even more loyal customer in the long run. However, it’s important to pay close attention when such things take place. A customer who is having trouble paying more and more frequently may warrant a lower credit limit or other restrictive measures and at the very least a frank discussion between you and a member of management.

Credit is just a part of doing business. Properly managed, it can help you build sales and attract customers. Managed poorly or not at all, it can easily become a business killer. But as long as you have a deliberate, detailed, disciplined approach to accounts receivable, there’s no reason it should keep you awake at night.