9 Tips For Managing Your Customer Receivables

Any sales that occur within a business where payment is not made up front (eg. retail) or in advance of the sale (eg. down payment for a car), is reflected as an “Accounts Receivable”, which is accounting terminology for amounts owing by customers to a business. It is good to have accounts receivable, as this means you are generating sales. The downside, however, of having accounts receivable is that it represents cash that you don't have now, and along with that comes the possibility that your customers won’t pay you.  Luckily a good system to manage your accounts receivable will help to reduce the number of non paying customers thereby avoiding bad debts.  Below are some steps to help manage and collect on your accounts receivable:

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1. Track your Accounts Receivable with Software:

If you allow customers to pay for your products or services after the date of the sale (i.e. not upfront), then it is essential to keep track of your accounts receivable. If you only have a few sales and a few customers, you can use a spreadsheet. Alternatively, you can use accounting software, especially if you have more than a few customers and/or transactions.   Businesses can use the following cloud based accounting software (or the numerous others that are available):

• Xero

• Quickbooks online or desktop

• Wave Accounting (free for invoicing)

• Freshbooks (this is mostly for invoicing and is not a full fledged accounting software)

Once you are able to track your accounts receivable by simply generating a report, you are able to stay on top of delinquent accounts.

2. Record Sales and payments As Soon As Possible:

It is important, with your accounting system, to record sales to customers as soon as they are made. If you are using an accounting software , this happens when you enter the invoice details, which can then (usually) be emailed directly to the customer via the software.

The sooner you invoice your clients and customers, the sooner you are likely to receive payment.  Also, the customer is less likely to find problems with a prompt invoice as the goods or services provided should be fairly fresh in their minds. 

You should also record payments promptly, to know exactly what the balance owing from the customer is and avoid the possibility of erroneously sending an invoice payment reminder relating to a paid invoice.

3. Verify Customers Ability to Pay

Before extending credit to customers, it is usually a good idea to assess their ability to pay.  Some ways to do this include:

Credit check: In Canada there are several ways to check a business’ credit score, the best known of which is probably Equifax. These reports provide detailed information on the customer’s credit history, including past payment behavior and current debt levels. (It might also make sense to check your own score)

Ask for References: This can be from other customers or banks

Establish Credit Terms: Offer credit terms that start with smaller amounts and shorter durations. You can then gradually increase credit limits and terms as the customer demonstrates their ability to pay.

Personal Guarantees: In some cases, especially with small businesses, you can request personal guarantees from the business owners.

Read Reviews: This can give you some insight into the type of business that you are dealing with

4. Offer Several Payment Methods:

One way to reduce accounts receivable and extending credit is to offer alternate payment methods including credit cards, services like PayPal or good old fashioned cash.  Although there are costs associated with credit cards, these are offset by reducing the possibility of a bad debt (customer not paying the amounts that they owe) as well as a reduction in administrative costs since you no longer have to chase the customer.

5. Offer Discounts for Early Payment:

An excellent method to incentivize your customers to pay as soon as possible is to offer them discounts.  One of the more popular credit terms is offer a customer a 2% discount if they pay within 10 days assuming the total balance is due within 30 days of the date of the invoice. (Repeat tip#1 - invoice as soon as possible!).

6. Review Accounts Receivable Regularly:

Many small business owners have a pretty good idea of what amounts are owing to them.  However, regardless of how good you think your memory might be, it is better to setup a process to review amounts owing by customers, regularly.  You should schedule a process whereby you generate an accounts receivable report regularly (weekly or monthly) and review it to ensure that customers are paying their amounts owing on time.  This allows for systematic follow up of delinquent accounts and knowing where you stand.

7. Dealing with Delinquent Accounts:

Frequent follow up of delinquent accounts greatly increases your chances of collecting them.  People will often prioritize payment based on how much of a hassle they expect to receive (which might also prompt them to pay on a more timely basis in the future just to avoid conflict).  Emails should be followed by phone calls.  Of course when dealing with an existing customer, you also don't want to be seen as harassing them.  Communications should always be polite, yet firm and should ask customers to confirm when you can expect payment. 

In some cases it may be beneficial to work out a payment plan if a customer cannot pay all at once. 

Finally, penalizing delinquent accounts can be effective way to ensure timely payments. This can be done by levying interest on overdue balances or charging an "admin" fee.  (just look at your utility or cell phone bill to see how this is done.  These companies tend to be extremely effective at collecting overdue amounts.)

8. Insuring and Factoring Receivables:

It might be worth considering buying insurance to protect against uncollectible receivables. This works in the same way that insurance works, although can be somewhat costly.  It works best when you have a lot of high value receivables and/or require cash flow on a more timely basis.  There are often restrictions on types of customers and balance limits, but it can be a useful method to help mitigate losses.

It is also possible to "sell" your receivables, which is useful when you require cash flow quickly.  Once again this tends to be costly and should only be used if absolutely necessary.  Many companies provide both insurance and/or factoring , which can be found through an internet search.  Alternatively, it may be worth contacting your bank or asking a business associate for a reference.

9. Submit to a Collection Agency:

If, despite all your effort, you are unable to collect, you can submit these accounts to a collection agency.  This is not ideal, but (as some people might know) collection agencies tend to be quite aggressive in their collection efforts.  Also, they usually charge based on amounts collected so there is no upfront cash outlay required.  If you have written off the accounts receivable, then the amounts collected are somewhat of a bonus. It is also important to keep a record of these customers and ensure that you don’t sell to them in the future.

Writing Off Uncollectible Receivables

If you tried everything and are unable to collect amounts receivable from customers, you would then write them off internally by reflecting them as bad debts. See my post (and video) on how to write off bad debts.

Managing accounts receivable can be pretty straightforward as many customers tend to pay on a timely basis.  For those who are more difficult, setting up a proper tracking system with frequent follow up can increase your chances significantly of being paid.  And for many small business owners, no matter how long we have been in business, it is always exciting to get that "cheque in the mail". 

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