What Small Businesses Need to Know About Accounts Receivable

Having thousands of dollars in limbo each month can give any entrepreneur nightmares. Before you make changes to accounts receivable, get insider advice on this popular sales feature.

Understanding A/R

Accounts receivable, or A/R, is a method of granting short-term credit to your customers. The client gets a product or service and you get an IOU for payment. Under accrual accounting, the initial transaction involves a credit to sales and a debit to accounts receivable. When the money arrives, the payment gets credited to accounts receivable and debited from a cash account.

6 Truths About Accounts Receivable

When looking at accounts receivable, consider these important points:

1. Accepting receivables can generate more business. You earn sales from customers who do not have commercial credit cards or choose not to use them. In addition, many companies depend on purchase orders and invoices for job costing, purchase validation and central control.
2. People are not going to pay when you want them to. Clients have slow internal processes, cash flow problems and other excuses. They may pay your net 30 bill at day 45, or even wait until you threaten collections.
3. Some people do not pay at all. Small businesses should expect to write off $3 for every $1,000 sold. Keep in mind that amounts vary by industry, business stage, credit policy and other factors.
4. Early payment discounts may speed up cash flow. By offering a two percent discount on invoices paid within 10 days, you earn a smaller profit, but you also receive the income without litigation.
5. Software and experts make life easier. Use a small business accounting program to view, track and take action on open invoices. At the same time, hire bookkeepers to stay on top of A/R issues before they become problems. Consult accountants and attorneys for industry-specific strategies and collections help.
6. A/R turnover should be high. This ratio measures how efficiently you collect outstanding balances. If the average payment drops or you spot an increase in days sales outstanding, you may be extending too much trade credit to risky customers. Try encouraging bank transfers and credit card payments, shortening your payment deadlines or requiring deposits.

Tips for Collecting on Receivables

You need customers to pay quickly to keep cash flow high and maintain accurate financial forecasts. Here are a few tips to improve the A/R collection process.

• Limit non-payment risk by checking credit scores.
• Be clear about expectations throughout the process. Publicize trade credit, late payment and collection policies. Act consistently.
• Make payment easy. Mail invoices with purchase order numbers, “payable to” details and pre-paid return envelopes. Offer online bill payment.
• Schedule phone calls and mailings. Contact customers regularly to ensure purchase satisfaction, review payment terms, check on invoice receipt and reiterate past due consequences.

Overall, remember that money left in accounts receivable is uncollected profit. Take steps to limit credit balances, speed up payment and decrease outstanding debts. A/R offers significant benefits for small business owners who are willing to manage the process.
 

At Verdeja, De Armas & Trujillo, LLC, our team of Miami accountants is dedicated to providing personalized and financial guidance. We provide accurate and comprehensive financial statements as well as in-depth business analyses. Contact us today for a small business accounting consultation.