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Good accounts receivable management practices

Accounts receivable management is a key part of managing any business. Neglecting this aspect can lead to a cash crunch, which in turn can have serious consequences.

What are accounts receivable?

An account receivable is an entry on a company's books following a sale, indicating that the customer has received a product or service and now has a set amount of time to pay the invoice.

In practice, when a company accepts to sell to customers on credit, it generally gives them 30 days to pay invoices in full before starting to charge interest and/or administrative fees.

Impact of accounts receivable on business activities

Impact on cash flow

As an entrepreneur, it's important to understand the relationship between your company's cash flow and accounts receivable. Each cash receivable dollar represents a sale for which you haven't been paid. In other words, you were entitled to payment in full right away, but instead you gave your customer time to pay the invoice. Your company voluntarily chose to stall its cash flow to help the customer and facilitate a sale.

In the meantime, in producing the product or delivering the service, you've incurred cash outflows (salaries, purchase of raw materials, etc.) Even if your suppliers also give you time to pay their invoices, there's a good chance you'll have to pay them before you receive payment from your customer, resulting in a net reduction of cash.

Good practices

A good tracking system for receivables

One of the basic requirements for managing a business is quality information. If your company wants to extend credit to its customers, it's important to put in place a good account tracking system that allows you to put receivables in chronological order.

In other words, management reports should give you to access the following information at all times:

  1. Receivables sorted by client
  2. Invoices sorted by client
  3. Time elapsed since invoice was issued
  4. Automatic reminder when a receivable becomes due

To avoid losing control over amounts due from your clients, it's important to update your books on a regular basis. It's also an excellent way to always have a clear picture of your finances.

Reducing the gap between cash inflows and outflows

Although it's sometimes difficult to obtain the funds to pay suppliers before receiving payment from clients, it's a good idea to try and reduce the duration of this “financing” period.

Following are a few suggestions:

Invoice by milestone

Some projects take a significant amount of time to complete. Think of the time it takes to build a building, for example. To make sure the entire burden of cash outflows isn't on you alone during this time, it's to your advantage to reach an agreement with clients to invoice in increments, as construction progresses, instead of all at once at the very end. You can, for example, agree on monthly invoices or an invoice each time the work progresses by 10%.

Offer a discount for quick payment

Always in the goal of collecting receivables faster, you can offer customers an incentive to pay you more quickly. It's common practice to offer a 2% discount for payments made within 10 days. The percentage may seem minimal, but over the long term constitutes substantial savings for your customers.

Suggest clients pay electronically

It's a well-known fact that technology offers considerable time-saving advantages. Giving clients the option of paying electronically is a popular business practice. Customers can transfer funds almost instantaneously from their business account to yours. You avoid wait times and your cash flow benefits.

Ask clients for a deposit

In many industries where products and services to be delivered require lengthy work, a deposit is requested from clients to cover a portion of the work to be done before the next invoicing period. This practice has many advantages, but collecting funds before delivery nonetheless comes with its share of risk. If, for example, the service is never provided, the amount collected is now owed to your client and need to be accounted for. Make sure your internal bookkeeping allows you to keep track of funds collected from your customers in advance.

Send monthly account statements

Sending out account statements to all your clients at the beginning of each month allows your customers to reconcile invoices received. It also helps you to ensure all invoices are recorded in your books, reducing the risk of lost invoices.

Establish a payment collection policy

Make sure you have in place a payment collection policy. For example, your company can choose to send an account statement after 30 days, a reminder after 60 days and to contact the customer after 90 days.

Use Desjardins's Billing and Expense Tracker tool for free

Simplify daily management of accounts receivable and keep your company's books up to date:

  • Create, manage and archive bids and invoices.
  • Manage expense accounts to facilitate production of tax returns.
  • Use client and supplier management modules to develop your business.
  • Access information—stored in a cloud-based system—at any time and from anywhere on your mobile device, tablet or computer.

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