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Expert Answers to Biz Questions

Listen in! Pick up some expert advice to a reader's question that we selected from CyberSchmooz.

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All About Your Accounts Receivable

If your business is a body, you are its brain, your accounting department is its circulatory system, and your accounts receivable is its bone marrow. No matter how efficient your accounting department is at delivering your business's lifeblood - that is, cash - to various departments to produce growth and success, you need a healthy accounts receivable to ensure there is enough cash to go around.

Managing your accounts receivable is not an easy task. Many businesses have died an ugly death because their accounts receivable wasn't balanced with its cash flow. To make the most of your business's bone marrow, you must develop a smart and effective accounts receivable policy - and for that, you need to know all there is to know about your accounts receivable.

Why Your Accounts Receivable Matters

For those new to business practices, the accounts receivable is the money you have coming to you. For example, if you provide services to a client but have yet to receive payment, that account is "to be received." Businesses aren't the only entities that have managed accounts receivable; employees who work for paychecks often wait for regular payments; and by doing so, they are maintaining an account receivable. It isn't inherently wrong for there to be a gap of time between services rendered and payment received - in fact, it is business as usual.

Conversely, it is vital that you keep a close eye on your accounts receivable because it severely impacts your cash flow. A healthy cash flow means more money incoming than outgoing, but accounts receivable exists somewhere in limbo between earning and spending. After you complete a service for a client, you have expended money, and you are merely waiting to gain it back. However, most clients will submit their payments (ideally on time), so having accounts receivable is a positive business practice; it means you are making sales, which is essential for business success.

Which Payment Policies Are Important

If it helps, you can imagine accounts receivable as small loans to your clients. You are fronting them the services or products they requested in the expectation that they will pay you back. As with most loans, the sooner they pay you back, the better. Yet, to ensure your clients are quick about making payments, you must enforce payment policies that both parties understand. The following policies have been shown to be most effective at discouraging delinquency and fulfilling your accounts receivable dreams:

  • Clear payment deadline. Avoid using business jargon like "net 30" or "15 mfi." Instead, give your clients a strict time frame, like "21 days," in which they can pay before incurring penalties.
  • Interest on late payments. Being as polite as possible, remind your clients that payments made after the deadline are subject to interest. Inform your clients beforehand how much that interest is.
  • Acceptable forms of payment. You aren't obligated to accept every form of payment. List acceptable forms of payment for your clients, so your clients won't make collecting your accounts receivable difficult.
  • Politeness. Studies show that saying "please" and "thank you" increases your payed invoices by more than 5 percent. Strive to be polite, at least until clients become delinquent.

What to Do With Delinquent Clients

Inevitably, some of your accounts receivable will go bust. More likely than not, it won't be your fault; some clients just don't have the cash or don't feel compelled to pay on time. Fortunately, you do have a few courses of action to continue collecting cash and avoid disrupting your cash flow.

First, you might consider participating in an invoice factoring program. Factoring companies will buy your unpaid invoices, discounting a small fee, allowing you to recover most (usually about 70-80 percent) of what you're waiting for to ensure you're solvent. Then once your client finally pays, you receive the rest of the invoice, minus the original fee.

Alternatively, you can leverage your accounts receivable to obtain an A/R loan. Unlike factoring, A/R loans must be repaid, and some have debilitating interest rates. If you are using the cash for necessary supplies or equipment to grow your business, the fast money infusion might be worthwhile. However, if you are seeking the loan because you are overburdened with unpaid invoices, this is a dangerous tactic.

Finally, if you prefer the idea of chasing your delinquent clients yourself, you must try to remain positive yet persistent throughout. After a payment deadline comes and goes, you should begin following up with your delinquent client, first through email and then over the phone. You might offer a payment plan or discounts if the client is unable to provide the full sum upfront. If the client still refuses to pay, you can seek legal action against your client, perhaps going to court to receive the payments you are owed - though this can be exceedingly costly.

Your accounts receivable is a vital element of your business, and it is your job to keep it healthy, so the rest of your business can grow.

 

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