For small business owners, managing your account receivables can quickly become a daunting task when one too many clients forget to pay an invoice. These receivables will pile up without you noticing, which is why it’s so important to keep an organized spreadsheet of who owes how much. It’s so easy to slip up on your management and end up having it take a toll on your cash flow.
When nothing seems to work, sometimes the smallest and most obvious things can make a huge difference. Here are seven changes you might not know you need to implement regarding your receivables management.
#1 Follow Your Clients On Social Media
Client relationship management is a key part of dealing with your accounts receivable – if you maintain good communication with your client, you have a much larger chance of being paid promptly and fully. Luckily, the internet, and social media in particular, has made managing your customer relationships easier in many different ways. But you can go further than just exchanging the occasional email.
Following your clients on social media can be a great way to enhance your relationship and keep a close eye on them at the same time, which in turn will provide you with helpful information when it becomes time to collect receivables. Contact them on birthdays, anniversaries, special company openings, if possible. These kinds of online interactions will help you out in the long run if you know what you’re doing.
#2 Create a Reminder System
Sending out reminders are crucial when handling past due receivables – but it can be helpful to go a step further and create a consistent reminder system, starting from even before the payment is due. At first glance, this might seem pushy, but so many clients delay their payments not because of negligence, but because they simply forget.
This is why scheduling reminder emails a week before the payment is due can be so beneficial. The email should use friendly language and simply repeat the payment terms and the upcoming due date. After the due date has passed, a reminder system should still be in place to send out emails every two weeks or so – don’t skimp on reminders! Being persistent is an essential part of collecting receivables.
#3 Embrace Installment Plans
Sometimes when a client is having a difficult time paying for a product or service, the issue can be rectified with a simple solution. More often than not, creating a deal in order to get paid back in installments (instead of the sum all at once) can be fruitful for both parties.
We’re not saying it’s a faultless solution; but everyone can agree that it’s a thousand times better to be paid back in small quantities across six months than to never see the money at all. Not only will you solve the problem creatively, but offering this kind of help will build a stronger relationship with your customer and thus, leave you with a good reputation.
#4 Consider Invoking Charges & Discounts
It’s a great idea to have terms surrounding your product or service’s payment that will encourage customers to pay promptly. This is where discounts come in. Getting to pay a percentage less overall if they pay early is a tempting reward for most customers. It might seem like a loss of money for you at first, but you will absolutely see a fantastic shift in how quickly you’re paid, which will shape your cash flow over time.
In a similar vein, when there are rewards, there should also be consequences, which will have the same stimulating effect on a customer’s willingness to pay on time. You should be adding finance charges whenever a payment is significantly overdue. Finance charges are a fantastic incentive to avoid late payments. Of course, you must be familiar with your state guidelines to make sure you’re not overcharging.
#5 Develop and Utilize KPIs
In order to truly improve your receivables management, you have to take a personal look at what you’re dealing with and monitor its change over time. How well are you really doing currently? Key Performance Indicators (KPIs) are an especially useful tool to answer this.
Your accounts receivable turnover KPI will reflect the rate in which your clients are finalizing payments towards your small business. You can calculate this by dividing your total sales in a certain time period by your average accounts receivable for that period. Other useful KPIs when managing your account receivables can be Days Sales Outstanding (DSO), Average Days to Invoice (ADI) and measuring credit overruns. Do your research on KPIs and see which ones work for bettering your business.
#6 Score and Rank Customers Using Financial Data
Like KPIs help measure your receivables management rate, you can use other types of financial data to make a comprehensive ranking system of all your clients. How does this help? Mainly, some customers’ payments will be more urgent than others, and will need to be dealt with first. Often we don’t realize this until we sit down and score our client base.
You can use calculation methods such as Cost of Credit (COC) to provide an insight of which account balances are affecting your small business the most, and therefore need to be kept an eye on. Then, focus on dealing with the customers at the top of the list and work downwards.
#7 Outsource Your Processes
Managing your accounts receivable can and will be an entire workload of its own. To help remedy the time and effort spent on it, it might be best to hire an established accountant for your small business’s processes. As another option, the usage of receivable management software such as Quickbooks can help you organize and automate several of the tasks required. Don’t be afraid of outsourcing your processes, or utilizing accounting platforms; it’s a smart decision to make when you’re running a business.go back