What It Is

If you want to be successful in business, your customers have to pay you on time. If you’re like most businesses, you sell products on a credit basis, and then ask your customer to pay you later, such as within 30 days. During this time, you essentially lend money to the customer, and expect that you are going to be paid back. Only when the invoice is paid do you have the money you need to successfully run your business.

It’s unfortunate that sometimes, getting what you’re owed isn’t always as easy as simply giving the customer an invoice. Almost all businesses have customers who don’t pay or simply pay slowly. If you don’t proactively manage your receivables, you can quickly deplete ready cash. Here are some ways you can protect your company from delinquent accounts and late payments.

1. Ensure that customers deserve credit. If necessary, perform credit checks and require that applications for credit be completed before you accept orders. If the purchase amount is particularly large, you can ask for and review the customer’s financial statements. Set limits for credit and then make sure they’re stuck to.

2. Run aging reports and make sure you review them regularly. Aging reports help you understand how your accounts are dispersed; they’ll show you which are less than 30 days old, 30 to 60 days old, 60 to 90 days old, or older. You and your staff should know how to interpret these reports so that you can spot problems early and take care of them. If necessary, assign someone specifically to follow up on problem invoices. The older invoices get, the more difficult they are to get payment for.

3. Send out invoices right away. If you are promptly getting invoices out, payments will come in sooner. You should also make sure that your bills are very clear and accurate. Include as much detail as possible. The more detail you include, the harder it will be for the customer to dispute the amount of the bill.

4. Reward and penalize. Implement a plan whereby you provide incentives for prompt payment and penalties for late payments. For example, you could give customers who pay within 10 days a 2% discount. You can also automatically assess a penalty fee if a customer is more than 30 days late with payment, for example. Make sure you stay within any limits set legally, so that you don’t get yourself into trouble.

5. Monitor your growth. If you have a sudden significant increase in sales, this can greatly impact your company’s receivables and cash needs. Use the advice of a seasoned professional to develop a strategy for growth. You might want to consider additional financing such as a line of credit from the bank, or consider adjusting your prices. You may need to deter growth short-term to make sure that you don’t outpace your ability to pay your own bills.

When companies are successful, they seek new ways to improve Accounts Receivable functions. By improving this process, they know they can reap significant financial benefit. If you have fewer outstanding, balances, this means you can have fewer bad debt write-offs and greater profitability. If your portfolio of receivables is well managed, this can also boost your cash flow and expand your working capital.