Issues with managing cash flows can stem from business owners prioritizing the wrong things.
This is what Courtney Barbee, the next generation owner of The Bookkeeper, told the National Federation of Independent Business (NFIB).
“So many businesses are so eager to obtain new clients and additional work, they do not put the proper structures in place to actually get paid for the work they are doing, or they ignore red flags that a client will be slow or resistant to pay,” Barbee said to NFIB.
Financial stability and cash flows are considered one of the most important challenges facing small business owners.
When you provide a customer or client with a product or service, you may bill them for the payment afterwards. This is called accounts receivable and it refers to the unpaid bills your customers have to pay.
If you have a large number of outstanding invoices, this means you’re providing services or products without being paid.
By creating a good accounts receivable system, you’ll have a better grasp on your cash flows and can put your business in better financial standing.
What does a good accounts receivable system look like?
An accounts receivable system helps you keep track of invoices sent, payments received, and any customers that may be past due on their bills. The system also has methods to address customers or clients that haven’t paid their invoices on time.
An efficient system should free up your responsibilities and allow you to focus more on running your business. If you don’t have an accounts receivable system in place, don’t worry. It’s not too late to get started.
Have a team
If you decide to hire an employee to handle the accounts receivables, it’s important to ensure they have the proper experience and background.
Consider someone with a good understanding of accounting and finance. This employee, or team of employees, will be tracking payments to your business. They can also help you with answering your questions about cash flows and how any unpaid invoices are having an impact.
The employee will also have to interact with customers that haven’t paid their invoices on time, so it’s a good idea to make sure they possess good customer service skills.
Create a policy
A good accounts receivable system starts with a thorough policy. The policy details the payment process after you provide a service or a product to a customer. For you and your employees, a policy explains the entire accounts receivables process. From invoicing to payment, your employees should know what to do throughout the process after reading the policy.
When a customer reads this policy, they should know how to make a payment and what can happen if there’s a late payment.
When you’re creating your policy, try to think of the ideal payment process you want to use for your business. Think about your preferred method of being paid for services, how much time you want to give customers to pay invoices, how often to reach out to them to pay their invoices, and what would happen if you don’t receive any payment.
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Invoices and cadence
Customers may not know a payment is due unless they receive a bill from a business. That’s why it’s important to send an invoice, which details what services or products were provided and the payment due.
Your accounts receivables policy should mention how quickly your business will issue customers an invoice. Whether it’s the day after, or a month after the service was provided, it’s good to write down in your policy when a customer can expect an invoice.
It’s also a good idea to include in your policy how often reminders will be sent to customers. This could be a reminder to let customers know their due date is coming up.
Addressing late payments
Even with an invoice and reminders, sometimes customers may still not pay you on time. This means your business isn’t getting paid for its services and can affect your cash flows. When you’re creating your accounts receivables policy, be sure to address late payments. Your employees should know what to do if a customer is past due and when to refer to a collections agency.
Try to determine how much time you want to give your customer to pay the bill. Because it’s late, you may also want to look into an additional fee. A late payment fee can be a percentage of the total bill due; it’s generally no more than 10%. You can also include a note on the invoice sent to customers so they’re aware of a potential late fee.
If a customer hasn’t paid a bill on time, you can have your accounts receivables team reach out to them with a phone call. Your policy should also detail what steps to take if the customer still hasn’t paid the bill after this check-in call. Whether it’s another phone call or sending an updated invoice, it’s important to stay on top of past due invoices.
If after several attempts to have the customer pay, sometimes you may have to refer to a collections agency. This is usually a last resort, but it’s a good idea to include this in your policy so a customer knows what can happen if they don’t pay their bill.
Unpaid invoices can have a significant impact on your business’s finances. While a collections agency can help get the missing payment, business insurance may also help your business recover loss accounts receivables.
You can also use technology to help you with keeping track of invoices. There is software and apps made specifically for accounts receivables, but you can also use an Excel spreadsheet. This can help you stay organized and quickly see which invoices are still open, paid, or late.
If you’re planning to use Excel, you can set up your spreadsheet in a few easy steps:
- Label your columns, “Customer,” “Invoice Date,” “Invoice Number,” “Total,” “Due Date,” “Payments,” and “Balance.”
- As you get payments from customers, you can enter them into your spreadsheet. You may receive smaller payments from a customer. If you do, just create another column next to the first “Payments” column.
- In the “Balance” column, use an equation to subtract the payments from the total amount of the bill. To do this, type an equal sign in the appropriate cell. This will bring up a smaller window in the cell. Select the cell that has the total amount for the invoice, then put a “-“ sign in the equation and click on the first payment. If there is an additional payment, put in another minus sign to tell Excel to subtract it from the total amount due.
- At the bottom of your Excel spreadsheet, you can label a cell “Outstanding Amount.” This represents the current amount of unpaid accounts. In the adjacent cell, click on the Σ symbol, which adds the values above this cell.
Creating and putting in place an effective accounts receivables system is important to your business. It allows you to easily track invoices issued to customers and quickly see how much your business is still owed for services provided.
Even if you don’t have a good accounts receivables system in place, it’s never too late to get started. Picking the right employees or team to be responsible for your accounts receivables means you can focus more on running your business. Creating a thorough policy that outlines when invoices will be sent out and how to address late payments is essential. Whether or not you decide to use technology to help you track outstanding invoices, ensuring you have a good accounts receivables system can be the difference between putting your business in a good financial position or running out of money and having to close the doors.
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