7 Ways to Boost AR Collections and Improve Cash Flow
If you’re focusing all of your attention on sales and not paying attention to getting paid for them, you’re setting yourself up for disaster. There’s an old business saying that goes, “A sale isn’t a sale until you’ve collected payment – until then, it’s just a loan,” and that’s very, very true. You can tally up all of the revenue that you’ve booked and be pleased with your success, but if you don’t get paid then all of those sales don’t mean a thing – and could conceivably be a harbinger of doom for your company’s ability to survive. You need to make Accounts Receivable just as important as sales.
Collecting Accounts Receivables in a timely and effective way is one of the most overlooked aspects of business and one that can lead to bankruptcy for companies that would otherwise have been profitable. There are many steps that you can take to make sure that your process is robust, organized and efficient. Adopt these seven strategies, and you’ll find yourself with a diminished Accounts Receivable and much-improved cash flow.
- Start with invoices that are easy to understand. The more clear and accurate your invoices are, the easier you make it for people to pay and the fewer excuses they have to delay. Using vague descriptions of what has been purchased and getting quantities or prices wrong are mistakes that should not be made, and that give your customers excuses not to pay quickly on time. Even the best-intentioned client who wants to pay in a timely fashion needs to have an invoice that is straightforward and free of error.
- Organize your AR records so you can quickly see the late payments. An aging report is a simple and straightforward document that will enable you to focus your collection efforts. By grouping client accounts based on categories of less than 30 days, 30 to 60 days, 60 to 90 days and 90+ days, you can not only easily identify the calls that need to be made and their order of priority, but can also advise your sales team about which customers have gotten to a critical point and for whom further credit should not be extended.
- Create a dedicated AR collections employee. If you have made collections into just one of many tasks for your bookkeeping staff, then you have not given it the attention that it deserves. This makes it far more likely that it will be pushed aside in favor of other tasks. Identify the staff member who has proven most effective at Accounts Receivable collections and make that their sole or primary responsibility.
- Don’t let past-due accounts sit for too long. There has been research done that’s shown that Accounts Receivable becomes more of a challenge, and the effectiveness of collections efforts drops precipitously, the longer the account is past due. This is one of the areas where an aging report can prove to be particularly effective: as soon as an account goes over 30 days (or whatever payment terms you have established with the client), start your collections efforts.
- Determine what your collections approach will be. Having a specific Accounts Receivable strategy in place and sticking to it is one of the best ways to increase your effectiveness, efficiency, and professionalism. You may want to establish a protocol in which your first outreach is an email reminder, and follow up with a phone call in a specified amount of time if payment is not received. By creating a set process, you strengthen the confidence of the employee responsible for collections and establish a progressively more aggressive set of steps to follow.
- Be open to being flexible. There will be times when a good client with a history of paying on time will experience a temporary cash flow problem. The more flexible and agreeable you are to create a payment plan, the more likely it is that you will actually be able to collect the money that you are owed. It is important that when taking this approach, you are still professional about it: put the payment plan in writing and get the other party to sign off on it.
- Recognize when the problem is beyond your resources. There are times when none of these efforts will prove effective and you need to hire a collection agency. It is important that this is included in the collections strategy that you establish so that you recognize the point of no return. Turning to this approach is likely to mean the loss of a customer. It also means that a good portion of the amount that you are owed is going to stay in the hands of the collections agency. Recognize this as a last resort.
The importance of a well-organized and well-managed Accounts Receivable effort cannot be overstated. Adopting the steps provided here will make a big difference in your business’ success and profitability.
Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies.
His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
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