Your company’s accounts receivable is the financial lifeblood of the firm. This is the money you’re owed for products and services.
Unfortunately, most businesses don’t properly handle it, though these mistakes may be direct or indirect. Poor policies can crimp cash flow, while refusal to pursue money owed hurts, too.
Much of this is due to mistakes companies make because of popular misconceptions.
Here are 5 things small businesses get wrong about receivables management:
You Let Account Receivables Sit Too Long
The value of accounts receivable declines as time goes by. Wait too long, and the odds you will collect go down. You’re also giving the customer the equivalent of an interest-free loan. One solution is to require payment up front.
At least collect within 30 days instead of waiting for 60 or 90. You should run an accounts receivable report weekly and follow up with companies that have hit your payment deadline to maximize the odds they pay in full.
Too many businesses think that this debt is a good thing, though they may be unable to pay their own debts because of it.
You Don’t Comply with Debt Collection Laws
Your collections team needs to be aware of debt collection laws. This includes state laws as well as federal laws. Violate these laws, and you can be hit with penalties and fines.
Provide training for your accounting team and debt collectors to ensure that you remain within compliance. Then you can send electronic reminders for overdue debt and make follow up phone calls without losing your ability to collect the debt.
You Don’t Have Standard Policies in Place
You should institute simple reminders like listing payment policies on invoices you send to customers. Have standard procedures for credit checks and the rules for issuing credit so that high-risk customers don’t receive a line of credit because someone wanted to meet their quota.
Have procedures for handling final payment, updating records and sending debts over to collections. Create set rules for payment plans and when they are allowed.
Invest in the right receivable solutions to enforce these policies across the organization and minimize the opportunity for error. Then you have a formal system in place for handling exceptions as well as ensuring accurate records are kept.
You Only Provide One Payment Method
This is a mistake for several reasons. First, you will lose customers who don’t use or trust your preferred payment method.
Second, your cash flow is affected if that one payment method isn’t working. The solution is to offer two or more ways to pay.
Consider accepting credit cards as well as checks and automatic deductions from their bank account. You may want to offer in-house debt financing or installment payments for those who can’t do the first two options.
You Aren’t Strategic when Offering Credit
Don’t extend credit to everyone. You’re going to end up selling products or delivering services to people who can’t pay for them.
Run credit checks on businesses, and consider checking their payment history. Furthermore, you may compound problems by letting people slow to pay their debts to continue buying on credit.
Give people reminders when their bills are overdue, and limit the damage by not letting them buy more until they’ve paid up.
Your accounts receivables are more than a measure of your salespeople’s performance. They have a direct impact on your ability to pay your own bills and manage your own credit. This is why you can’t make a mistake managing this critical source of revenue.