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  • Writer's picturePeter Geh

How to Speed Up Your Small Business Accounts Receivable Collection so You Get Paid Faster

Updated: Apr 11

Are you struggling to collect quickly on your sales and accounts receivable (A/R)? Cash flow from sales is the lifeblood of any small business; however, many small business owners suffer because they don't implement practical, easy to set up processes to help speed up the collection of their accounts receivable. Below are good ways to help improve the collection speed of accounts receivable that any small business can implement. As always, if you have a question or think you might want to work together, please get in touch through my Home Page. Also, never miss a blog by following me on LinkedIn or Facebook.

Speed up accounts receivable collection to improve cash flow.

1) Offer a Prepayment Discount

While you may not like the idea of giving a discount for paying on time, the reality is that your customers probably have a lot of things to pay. If you provide them an incentive to pay you on time, well guess what, you will likely move up their list of payment priorities and your cash flow will likely improve. The discount doesn't have to be huge, try 2% to 3%, maybe up to 5% if you really want to boost your accounts receivable collection speed.

2) Automate Account Receivable Collection Efforts

If you use modern accounting software such as Xero or Quickbooks Online, these tools have the ability to automatically remind your customers about invoices and whether they are overdue. I urge all small business owners to explore using these tools as a means to collect accounts receivable faster. Something to keep in mind though, the language and frequency of these automated reminders needs to be professional and reasonable. I recommend sending reminders on the due date, 5 days after the due date, and then 10 days after the due date. Each reminder should stress a slightly increased sense of urgency but should remain professional. You'll note that I stopped the reminders with 3 because I find that automated reminders beyond that aren't going to really do anything because if you haven't received payment by now, there's probably some other issue. At this point in time, if you haven't collected, it's time to pick up the phone to get to the bottom of the issue. IMPORTANT: While these reminders are great to help speed up collection, it is REALLY annoying to customers when they have paid your invoice but are still getting reminders to pay. As a result, if you're going to use automated reminders to collect accounts receivable, you need to keep your bookkeeping really up to date and mark invoices off as paid right away.

3) Send and Prepare Invoices Right Away

You are way more likely to a) collect your invoices at all, and b) collect your invoices on time, if you invoice right after you provide your services or goods, or on time-based on whatever terms for billing you have arranged with your customers. In my experience, if you wait to invoice your customers, the good-natured will of people to pay for good products and services diminishes a bit and the timer on when your customers think they need to pay you starts that much later. The best businesses invoice immediately to improve cash flow.

4) Make Payment Terms Clear, Reasonable and Known

Never assume that your customers know that you expect to be paid within 15 or 30 days, or whatever your payment terms happen to be. It is best practice to be upfront about payment terms, so make sure your customers know what they are. You can and should state your payment terms on your engagement letters, website, ordering forms, etc. In addition, when you actually provide your invoice, make sure your payment terms are clearly stated on your invoice as a reminder. IMPORTANT: You should think about what's reasonable or standard in your industry for payment terms. In my experience, unreasonable terms are often ignored. Remember also that if you are invoicing a larger organization, your invoice needs to be received by the company, entered by accounts payable, approved by someone there, and time needs to be allotted to actually processing the payment. As a result, terms of say 5 days might not even be feasible for some of your customers.

5) Make Payments Easy by Offering Enough Payment Options

I often see invoices go out to customers by my clients that lack sufficient payment options. For example, if you only accept cheques mailed to you, your collection of accounts receivable is going to be much slower than businesses that also allow credit card payments, electronic funds payments, email money transfers, etc. While you might not like the idea of paying a credit card company 2% to 3% for processing, the cost of not getting those payments in quickly could be much greater. In my experience, if your service is $500 or less, you should definitely be offering a credit card payment option.

IMPORTANT: In addition to just providing your customers with more payment options, you should make sure that your invoices go out with convenient "Pay Now" options as well. Services like Stripe, Plooto, and Go Cardless allow you to integrate your invoicing tool with their services making payment a breeze for your customers.

6) Monitor your Accounts Receivable Closely, and Pick Up to Phone When You Need To

While you can do a lot of things to help you automate the collection of your accounts receivable, you, your bookkeeper or other accounting staff need to closely monitor the balance. A proactive approach to managing your accounts receivable is best and you should likely be looking at things at least weekly or bi-weekly, especially if you are struggling with cash flows. Also, in case you aren't doing this, pick up the phone to call your customers about overdue accounts. Be professional on those calls, however, you'd be surprised how many small business owners rely way too heavily on emails or text messages to collect accounts receivable. IMPORTANT: By calling your slow-paying customers, you actually might learn that your products or services weren't actually well received or adequate. In this case, it's not just the issue of slow-paying, but you actually have a chance to make that customer’s experience a positive one. For this reason, calling when appropriate is so important.

7) Train Your Employees in Better Accounts Receivable Collection Practices

Never assume that your bookkeeper or accounting staff know the best practices for collecting accounts receivable. Be open with them about the importance and make sure they are doing whatever they can to help collect accounts receivable on a timely basis. You may not realize this, however, many bookkeepers and accounting staff are actually apprehensive about collecting accounts receivable because people tend to stray away from potentially awkward conversations and situations. Make sure you are always supporting your staff through good training and appreciation.

8) Consider Changing Your Payment Terms to Upfront Payment or Based on a Retainer

Depending on your services or products, it might make sense for you to charge for your services or products before they are provided. If you provide services only, you should consider a retainer, especially for new customers or one-time customers where the amount of work and time you will provide could be significant. Once you feel more comfortable with the new customer, you could reduce the retainer for future work, or eliminate it completely. IMPORTANT: If you charge upfront for your products and services, you won't really have a collection issue to worry about, however, you should realize that not offering payment terms could hurt your level of sales since some customers might be relying on terms or will otherwise expect them. If a competitor is offering a similar product or service that offers terms, you might lose revenue opportunities.

9) Keep Customers Up to Date on Charges, Especially if you Are Overbudget

I despise it and TRUST me, so does everyone else. Unexpected charges, or surprisingly higher than anticipated invoices are not well received by customers and they will be slow to pay them in most cases. All industries including construction, trades, and services providers commonly commit this invoicing mistake and the root cause is always poor communication.

If the job is changing, you find unexpected problems, or timing issues are increasing costs, talk to your clients about the issues you are facing. At least this way, the client can either adjust something on their end, or accept that costs are going to be higher than previously discussed. If you don't have this proactive conversation with your clients, expect significant collection issues and awkward/unpleasant conversations. Better communication about your invoices, even if they are off track will go a long way for improving collection.

10) Consider Using an Accounts Receivable Factoring Company

While this isn't a sexy or cheap option by any means, sometimes if you are faced with 90 to 120-day collection delays, you might have no choice but to consider factoring some of your slow-paying invoices so you can keep paying your suppliers. Factoring has the benefit of getting you paid quickly but can come with fees of 3% up to 10% depending on your industry and who your customers are. In addition, something to be aware of is that not all factoring companies are equal, do your research and make sure they are reputable and don't have hugely burdensome requests and criteria every time you want to factor a receivable. Finding a factoring company that specializes in your industry will also help improve your experience if you want to explore this option.


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