How to Improve Your Accounts Receivable Process

Finance

As a business owner, you have little control over how soon your customers pay you. However, there are a few things you can do to help shorten the payment cycle. One is to examine your accounts receivable process. If your company’s cash flow is suffering because of the amount of time it takes customers to pay, you can take steps to fine-tune your movement of receivables.

Here are some questions to ask when analyzing your company’s accounts receivable process:

How long does it take to get an invoice out?

Once your company completes work for a customer, the clock starts ticking on your payment cycle. Deciding when to cut an invoice, guiding it through the approval process and delivering it to your customer all add precious time to the process. Upon receiving the invoice, your customers make their own decisions on timing their payments in ways that optimize their cash flow.

Ideally, you want a process in place that is attuned to when your company completes work and can deliver an invoice within the same day. If your accounts receivable requires days to process an invoice, that just prolongs the payment cycle and hurts your company’s ability to generate working capital.

Are your customers motivated to pay faster?

There are some steps you can take to gently push your customers into paying on time or even early. One way is to start making collection calls before the payment is overdue. Make it a practice to touch base with your customers via phone or email the exact date payment is due, rather than waiting 45 days or longer. If your customers know you are diligent about collecting on receivables, they are more likely to pay on time to get you off their back.

You can also provide incentives for early payments. You might be reluctant to knock 10% off the invoice value for payments within 15 days. However, your cash flow will benefit if the discount drives faster payments from some of your customers.

How clear are your terms?

Although net 30 is the expected payment term in most industries, it helps to specifically spell out your terms in invoicing, agreements and other customer correspondence. Your company’s policies and procedures need to be clear and consistent.

However, you should build some flexibility into your accounts receivable process for special circumstances. If a valued customer is having trouble paying on time and in full, you might adjust your terms to accommodate the customer. This helps ensure you are receive at least a portion of the payments due.

Where are the internal bottlenecks in your process?

If it takes days to send out an invoice, or if most customers wait 60 to 90 days to pay, you need to take steps to tighten your internal process. Is there poor communication between operations and accounts receivable? Is your company making collection calls in a timely manner? Is the technology you use outdated and unreliable? These are some of the bottlenecks that might be adding days to your payment cycle.

How easy do you make it for the customer to pay?

Ideally, your accounts receivable process should be as automated as possible and conducive to how customers expect to receive invoices and make payments. More and more businesses today use sophisticated accounting software that makes paying an invoice as simple as a mouse click for customers. When taking on new business, get a feel for how tech-savvy your new customers are and if they prefer to handle their transactions digitally.

For more information on software technology that can help optimize your accounts receivable process, read our article, "Accounting Software for Trucking Companies."