Accounts Receivable Collections

One of the most important, but overlooked, aspects of small business ownership is accounts receivable collection.

Often, a small business owner is great at what the business does, but does not pay attention to the financial aspects of the business. You have often heard of the great chef who prepares great food and gets wonderful restaurant reviews but his business closes its doors because of financial difficulty or the person who knows everything about printing and produces great work, but they sell to a smaller competitor because they could not manage the finances.

Successful businesses require two qualities to succeed: being good at what you do and have a strong “back office” to run the administrative and financial aspects of the business. If both qualities are not well maintained, the business can fail.

Accounts Receivable Collections: "One Of The Most Overlooked Aspects"

In my many years of working with small businesses, one of the most overlooked aspects of the financial side of a business is accounts receivable collection. Cash flow is critical to business success. There is a reason the old saying “Cash is King” has been around for so long. It is because Cash is King! While cash looks good on your balance sheet sitting in the Accounts Receivable column and it makes all of your financial ratios look great, it does nothing to help with your daily bills that come out of the checkbook.

The quicker that you can collect your invoices, the more profitable your business can be. There is a carrying cost to your company by offering credit to your customers in the form of payment terms. When you offer terms, you are offering a no interest loan to your customer and you are in the banking business.

There are programs offered by banks, such as Chesapeake Bank’s Cash Flow program (www.chesbank-cashflow.com) to help speed up cash flow, but these programs do not address the problem of collections.

So, how can you move the money from your balance sheet to your checking account? There are several strategies and methods, but we will just list three ways to improve your collections.

Before the Sale

Before you agree to the work, you need to ensure that your potential customer understands your terms for collection of payment. If you offer net 30 terms, make sure that they acknowledge the terms and ask them if they see any problem in making payment within that timeframe. It is better to know upfront what both parties expectations are rather than finding out three months down the road.

It is also a good idea to run a credit check on any customers who you will offer terms. This can be as simple or a detailed as you would like, but it most often entails having a credit application where they provide acknowledgment of the terms of the sale and the payment process; credit references; and enough information to allow you to run a credit check if needed.

Once you have all of your information and you are comfortable that both parties understand the expectations, you can start the work.

The Day of Invoicing

It is valuable to contact your client upon the completion of the work and to ask them if they are satisfied that the requirements for invoicing have been completed. It is better to determine any problems at this time so you can quickly address them. It is also good to electronically invoice your customer either via fax or e-mail and let them know that you will follow up with a hard copy of the invoice in the mail. Lastly, you should call a day or two after you send the invoice to ensure that it was received and put into the system for payment. All of this dialogue can take the form of customer service and customer satisfaction. It is important to maintain contact with your customer, ensure that they are happy with the results and that there is no impediment to payment.

After the Sale

You need to have a planned process for collections. It can be a simple as clearing a time on your calendar once a week to call any clients whose invoices are due to be paid within terms to make sure that the check has been cut and is in process or to find out why it is not in process. A second call or letter may be needed for invoices 15 days past due to again check for problems. For invoices that are 30 days past due, a visit by either the sales representative or project manager may be needed to determine any problems and work out a solution. If an invoice reaches 60 days past due, it is important to have a policy and procedure in place to gain collection. This can be a personal visit from the owner, to retaining a collection firm to filing a judgment through the legal system.

If the collections process is in writing, it is very easy to schedule it into the workweek, which allows the business to be proactive in collections rather than reactive.

While these are just three areas to improve Accounts Receivables Collections, they will help reduce some of the sleepless nights associated with small business ownership.