Receivable management is a critical process for small businesses, as it helps to ensure that cash flow is maintained and that late payments are avoided. Unfortunately, many small businesses fail to effectively manage their receivables, which can lead to financial trouble.
This often leads to cash flow problems and, ultimately, business failure.
The purpose of this blog post is to help small businesses understand the importance of receivable management and how to optimize their practices in order to improve their chances of success.
There are a number of reasons why small businesses may struggle with receivable management, such as lack of resources, poor invoicing practices, and inadequate collection efforts. To ensure the success of your business, it is important to understand the causes of poor receivable management and take steps to improve your practices.
Lack of Resources
One of the most common reasons for poor receivable management is a lack of resources.
Small businesses may not have the staff or financial resources to manage their receivables effectively. As a result, they may not invoice customers promptly, fail to follow up on late payments, or not pursue collections aggressively.
Poor Invoicing Practices
50% of companies wait between 10 and 25 days for invoice approval (Source: Paystream Advisors).
In addition to a lack of resources, poor invoicing practices can also lead to problems with receivables.
For example, businesses may not include all the necessary information on invoices, such as the due date and contact information for customer service. They may also send invoices late or not at all. This can lead to confusion among customers and make it difficult for them to pay on time.
Inadequate Collection Efforts
Another reason for poor receivable management is inadequate collection efforts.
Businesses may not have a system in place for tracking payments and follow-up on late payments. They may also be reluctant to pursue collections aggressively, which can lead to lost revenue.
In order to improve receivable management, businesses should develop a system for tracking payments and follow-up on late payments. They should also pursue collections aggressively, using all available methods including letters, phone calls, and legal action.
How can small businesses improve accounts receivable management?
Small businesses can improve their accounts receivable management by following a few simple steps. The most important step is to develop and implement a solid invoicing and collections policy. This policy should include a clear payment terms, late payment penalties, and a process for collections.
Another key step is to use a good Accounts Receivable (A/R) software. This software will help you keep track of payments, invoices, and customers. It will also help you to quickly and easily generate invoices, statements, and reports.
Finally, you need to be proactive in collecting payments. Stay in touch with your customers, and be persistent in reminding them to pay their invoices. You may also want to consider using a collections agency if you have customers who are consistently late in paying their bills.
Steps to improve accounts receivable management
- 1. Make sure your invoices are accurate and include all the necessary information.
- 2. Send invoices as soon as the work is completed.
- 3. Follow up on unpaid invoices promptly.
- 4. Use a collections agency if necessary.
- 5. Train employees in accounts receivable management.
Accounts Receivable Best Practices
The accounts receivable process is one of the most important, but often overlooked, aspects of a business. Establishing and following best practices for accounts receivable can help streamline the process and improve cash flow.
There are a few key best practices that businesses should follow when it comes to accounts receivable. First, it’s important to have a policy in place for how long you will wait to receive payment from customers.
Second, make sure you have a process in place for tracking and follow up on invoices. Finally, make sure you have a good system in place for collecting payments.
By following these best practices, businesses can improve their cash flow and reduce the amount of time they spend waiting on payments.
Best practices for accounts receivable include:
- Establishing clear payment terms with customers
- Collecting payments as quickly as possible
- Investigating and resolving invoice disputes quickly
- Maintaining accurate and up-to-date records of account activity
Key metrics to monitor accounts receivable efficiency
There are a few key metrics that businesses can use to measure and monitor accounts receivable (A/R) efficiency. The most important metric is Days Sales Outstanding (DSO), which is the average number of days it takes to collect receivables. This metric can be tracked on a monthly or quarterly basis.
Another key metric is Accounts Receivable Turnover (ART), which is calculated by dividing net sales by average accounts receivable. This metric measures how quickly A/R is collected and can be tracked on a monthly or annual basis.
Finally, Accounts Receivable Collection Period (ARCP) can be used to measure the average number of days it takes to collect payments from customers. This metric can be tracked on a monthly or annual basis.
These metrics can help businesses understand how quickly they are collecting payments from their customers, and how effective their collections process is. They can also help identify problem areas and identify potential improvements that can be made to increase A/R efficiency.
Most small businesses fail when it comes to receivable management. This is often because they don’t have the systems in place to ensure that invoices are paid on time, and as a result, they can’t take advantage of the discounts and incentives that are available to them.
If you’re looking for a way to improve your receivable management, here are a few tips that can help:
1. Implement a payment terms policy.
One of the best ways to improve your receivable management is to implement a payment terms policy. This will ensure that all invoices are paid on time, and it will also give you the leverage you need to negotiate better discounts and incentives from your suppliers.
2. Use an invoicing system.
Another important step in improving your receivable management is to use an invoicing system. This will help you keep track of all outstanding invoices, and it will also make it easier to follow up on payments.
3. Offer discounts for early payment.
One of the best ways to encourage customers to pay their invoices on time is to offer discounts for early payment. This will provide an incentive for customers to pay their bills as quickly as possible, and it will also help you save money on interest payments.
If you’re struggling with receivable management, we hope the tips shared in this post will help turn things around. Be sure to share this blog post with fellow small business owners. Support us by subscribing to Business Management Blog.