Last editedApr 20233 min read
Despite the importance of a healthy cash flow, many businesses simply don’t realize how much money may be languishing on their balance sheets. By optimizing your company’s accounts receivable strategies, you can free up some of that capital to boost liquidity, reduce debt, bankroll growth, and beat out the competition.
Why is accounts receivable so important?
Ideally, all invoices would be paid on time and there would never be any need to chase customers. Unfortunately, this is rarely the case, and a culture of late payment affects businesses all around the world. This has a knock-on effect on your cash flow. If too much working capital is tied up on the balance sheet, your company could end up in a precarious position, and there may not be enough cash to invest in growth, fund new products, or increase pay-outs for shareholders.
By optimizing accounts receivable – a term for outstanding invoices owed to your company by customers – you can help your business maintain a healthy cash flow. That’s important for businesses of all sizes, not just start-ups and SMEs. So, here are our top eight accounts receivable process improvement ideas to ensure your business doesn’t end up with too much capital stuck in accounts receivable.
1. Offer positive (and negative) incentives
If there’s no benefit to paying within the agreed payment terms, your customers will simply pay their invoice at a time that suits them. After all, what do they have to lose? By offering a small discount – around 5%, for example – to businesses that pay early, you can incentivize your customers to pay faster. By the same token, negative incentives like charging interest on late payments can be an effective way to let clients know that you’re serious about minimising late payments. Of course, you should think carefully before imposing negative incentives, as it could lead to strained relations with your customers.
2. Stay in contact with your customers
A significant part of accounts receivable collections best practice is simply about picking up the phone. There may be legitimate reasons for late payment, and by working together with customers to find a solution, you can avoid late payments from becoming a recurring problem. In many cases, customers simply need to be reminded that payment is due. Why not set up your billing system to issue timely reminders after the invoice date has passed?
3. Maintain accurate customer data
It’s easy to underestimate the delays that can be caused by inaccuracies within your billing and collection system. While details like payment terms and credit limits need to be accurate, even a relatively minor error like an incorrect email address can lead to delays, as the invoice may not get delivered to the right person. AR best practices include regular audits to maintain the accuracy of your client database and comprehensive training for staff who handle information on a day-to-day basis.
4. Ensure your credit policies are clear and concise
As accounts receivable is essentially a form of lending to customers, it’s important to have clear and concise policies around recovering debt and issuing credit. Ensure that finance and sales teams work together to set policies that make sense for your client base, determine the exact circumstances when credit limits should be extended, and make sure that the credit approval process is regularly reviewed to adapt to changing economic conditions.
5. Use regular monthly fees rather than standard invoices
When it comes to accounts receivable processes and procedures, billing your customers on a monthly basis – instead of irregular invoicing patterns – can be beneficial. Not only will it help to simplify your budget, but it will simplify the budget of your client, making them more likely to pay on time. Plus, switching to regular monthly fees ensures your customers can pay with ACH Debit, making it much easier to take payment when it’s due.
6. Streamline your invoicing workflow
To avoid accounts receivable from becoming a significant problem, it’s important to cut out any errors within your accounts receivable business process flow for invoices. From incorrect client information to forgetting to issue an invoice at all, there are plenty of areas where you can slip up. Use invoice templates to make certain that you’re including all the relevant information when you request payment, and to speed up the process, issue invoices via billing software as soon as work is complete, rather than invoicing in batches at the end of the week or month.
7. Automate wherever possible
Chasing payments is time-intensive and admin-heavy. One of our top accounts receivable strategies is to automate as much of the process as you possibly can. Electronic billing systems like Xero or QuickBooks can cut down the amount of time you need to spend on reconciling invoices. In addition, automated billing systems allow customers to click straight through to settle their invoice, making the process easier for both business and customer.
8. Allow your customers to pay with Direct Debit
Another fundamental part of your AR best practices should be making payment as easy as possible for your customers. This means offering a wide range of payment options, including cash and cheque, credit and debit cards, bank transfers, and ACH payment. ACH Debit is especially effective as it is a “pull” payment, rather than a “push” payment. Essentially, this means that the payment is pre-approved, and the customer doesn’t need to act to authorize payment. Therefore, there’s no need to chase.
Don't forget to check out our guide to setting accounts receivable goals to ensure your business stays on top of cashflow.
We can help
GoCardless can help your business take payment automatically via Direct Debit. Find out more about how GoCardless can help optimize your accounts receivable processes and procedures.