Getting Your Small Business Accounting in Shape: Part 4 – Accounts Receivable

Welcome back to our small business accounting series! Previously we  explored revenue, expenses, and investing. Now let's continue building a strong financial foundation for your business by delving into accounts receivable practices—crucial for maintaining healthy cash flow.

In Part 4, we’ll break down why efficient accounts receivable practices are critical to keeping your cash flow healthy and how you can tighten your processes to avoid the common pitfalls that many businesses face.

Understanding Accounts Receivable

Accounts receivable represent the outstanding invoices that your clients owe for services rendered or products sold. In simpler terms, it’s the money you're waiting to receive.

Keeping a close eye on your accounts receivable is essential because without proper management, you could find yourself in a cash crunch, unable to pay your bills or invest in growth opportunities.

If you’re new here, our beginner's guide to small business accounting can help you grasp the basics. For those looking to optimize their financial operations, let's dive into how managing accounts receivable ties into your broader growth strategy.

Evaluating Your Accounts Receivable Process

Evaluating your A/R process often reveals the same pain points that many small businesses face—late payments, non-payments, and inefficient invoicing practices.

Collecting payments is rarely fun, and slow-paying clients can lead to frustrating cash flow problems. If your business is experiencing an increase in delayed payments, you are not alone. Even worse are non-payments, where chasing down money can strain client relationships but is sometimes unavoidable.

On top of that, a disorganized or sluggish invoicing system can contribute to the issue, causing confusion for customers and delays in receiving payments. Addressing these problems head-on is key to improving your accounts receivable process.

Improving Invoice Practices

Your invoicing process is the first line of defense in managing accounts receivable. A few tweaks here can significantly improve the chances of getting paid on time, which is critical for maintaining healthy cash flow.

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• Ensure your invoices are crystal clear.

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Avoid industry jargon and be specific about what you’re charging for. For example, instead of saying "consulting services," try something more precise like "5 hours of marketing consultation – July 2024." This eliminates room for misinterpretation, making it easier for clients to understand exactly what they owe.

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• Promptness pays off.

Sending invoices promptly after delivering your product or service increases the chances of timely payment. For instance, if you complete a project on a Monday, send the invoice the same day or by Tuesday morning. The longer you wait, the lower the urgency in the client’s mind, which often means your payment gets pushed to the back burner.

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• Make sure you’re including all the necessary details.

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This should include the due date, accepted payment methods, late fees (if applicable), and your contact information. The easier you make it for clients to pay, the quicker you’ll get your money.

• Consider upgrading to an electronic invoicing system.

This setup simplifies the payment process, handling tasks like sending reminders to clients and enabling them to pay directly online. For example, platforms like QuickBooks and Ramp provide features like automated billing, recurring invoices, and integrated payment options.

Other benefits include:

• Reduced manual tasks
• Faster payment processing, meaning quicker access to your funds
• A clear digital paper trail for easy tracking and reporting
• Increased transparency for clients, reducing the risk of disputes over payments

Techniques for Managing and Reducing Outstanding Receivables

Even with the best invoicing practices in place, it’s inevitable that some receivables will still slip through the cracks. To stay on top of late or unpaid invoices, businesses need to adopt effective strategies to manage and reduce outstanding receivables.

• One of the most important tools is regularly reviewing your A/R aging reports. This process allows you to see exactly who owes what, how overdue the payments are, and which clients need immediate follow-up.
• Another technique is offering clients the option to pay with credit cards or set up automatic payments. Credit card payments are processed faster than checks, and setting up automatic payments for recurring services ensures timely and consistent cash inflows.
• Additionally, offering early payment discounts is another tactic that encourages clients to pay ahead of schedule, further reducing the chances of delayed payments.
• Or you can also implement payment terms with late fees to act as a deterrent for late payments. This motivates clients to pay on time to avoid extra charges, making it clear that delayed payments will have financial consequences.

There are also times when a collections call becomes necessary. To conduct one effectively, start with a polite reminder, clearly stating the amount due and the original due date. Stay calm and professional to maintain the client relationship, and offer solutions like payment plans if needed.

Finding a Partner for Invoicing Support

Managing accounts receivable effectively is time-consuming and, let’s face it, a bit of a headache. If it’s feeling overwhelming, there’s no shame in seeking help.

At Decimal, we offer expert invoice support services tailored to streamline your A/R processes, handling everything from invoicing to collections, so you can ensure your business is operating with a steady, reliable cash flow.

Get a free bookkeeping consultation with Decimal today to learn how our expertise can support your financial management and drive your business forward.