Almost all small business have some sort of accounts receivable account. But a wide variety of payment and AR challenges can put obstacles in the way of an efficiently functioning business.
I once worked for a retailer that never figured out a solid system for purchase orders. Even though the number of orders per year was minimal, it took time away from employees who should have been focusing on strategic initiatives. Had we taken the time to set up a thought-out system, we could have easily increased our sales with little extra effort – that’s the goal right? Less work, more profit.
With these simple tips below, you can quickly start to improve your accounts receivable system to save time and money.
We are in the digital age. It’s time to transfer your systems. You will save time and money by using technology to assist you with your accounts receivable work.
For example, rather than printing, folding, envelope stuffing, stamping, addressing, and mailing, you can set up a process to email out the latest rounds of invoices at the click of a button. Imagine the time that saves!
It will take a little bit of work to get it set up, but once that’s done – you’re set! It should take no more than a few hours, depending on the accounting system you use. Contact your accounting software support first to ask them how it works. They should be able to direct you. If this doesn’t seem feasible, I recommend hiring an expert to help you. The cost will be well worth the time you save.
Use a credit application
It may seem unnecessary to require a credit application from customers, but it is definitely worthwhile. It will automatically weed out any potential customers who aren’t serious. And those that do fill it out will provide information that is helpful.
Often companies request address, business history, bank references, and business references. Make sure to actually contact the references provided.
Create credit limits for each customer & enforce them
Give each customer a credit limit and make sure they agree to the number. Depending on your industry and your cash flow, this could vary. Some companies choose to base the credit limit off 10% of the customer’s monthly sales. Others use net worth x 10% but that’s a little bit harder to determine.
Another option is to ask their trade partners when calling for a reference how much credit is extended to them.
Lastly, keep in mind that you want to base the credit limit off of their general need. They may not be ordering more than a few hundred dollars at a time, in which case you could easily set it at $500 and be done.
Be timely with data entry
This is not a new concept but one that’s important enough to stress. Be timely with all data entry! Do not procrastinate entering orders, shipments, payments, or any other business transactions. You do not want a situation where a customer calls to find their balance and you don’t know what to tell them because you aren’t up to date.
Just like cleaning your home or taking care of a stack of laundry – timely data entry prevents mistakes and procrastination from piling up.
Make a plan for follow-up
Determine how often you will check in with your customers. Create a schedule that tells everyone when the invoice will be emailed and when a reminder email will be sent out. Do not let customers get away with ignoring their payments. Create a system that everyone agrees to and stay on top of it.
By staying on top of the workload, creating a system for digital invoicing, checking the financial health of your customers, and thinking through your credit limits you will greatly improve the health of your accounts receivable process.