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26 Things Every Small Business Owner Should Know About Receivables Management

If you are ready to take control of your receivables management, here’s everything you need to know about your receivables, from A to Z.

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L – Late Payment Excuses: You’ve probably heard every late payment excuse in the book. Some of the toughest excuses to respond to might come from your favorite customers who are appealing to your soft side – don’t let them. It’s important to remember that you’re running a business and when someone owes you money, you have to set the precedence of politely but firmly informing them that payment is expected on time.

M – “Managing” receivables: Managing receivables is a term you probably hear a lot, but just what does it mean? The fact is, overseeing your company’s collections isn’t simple. You have to take the time to create an infrastructure that allows you to monitor, track and organize your invoices once they are sent.

N – Negotiate: If a customer tells you that they can’t pay on time, one strategy you can employ is to negotiate a payment plan. Though you won’t get a full payment on time, you’ll still get paid in the form of smaller amounts over a longer period of time. This helps you manage cash flow and potentially salvage a relationship with your customer.

O – Organization: Part of receivables management is making sure nothing ever falls through the cracks. It’s your job to ensure that you never discover an invoice that is 11 months overdue. Start today by implementing a structure for your collections management. How do you organize invoices once they are sent? Where do you take notes on contact with the customer about the invoice? Find a system that works for you and implement it immediately.

P – Policy: Setting up a smart credit policy is essential. You should begin by researching what the standard credit policies of your industry are. Make sure your credit policy is among the terms of sale stipulated in the purchase order or contract.

Q – Qualification: Unless trade credit is the absolute industry standard for your business, you shouldn’t be extending credit to all your customers. And even if it is the industry standard, you don’t have to do business with everyone. Having a credit application for potential customers to fill out is instrumental in the receivables process. You must do some detective work on each customer and learn about their past payment behavior to see whether or not they are a trustworthy customer. If you do more work upfront vetting the customers, you will do less work on collecting late payments in the months to come. Begin by creating a credit application that will give you all the information you need to truly qualify a customer.

R – Rewards: Though you might extend trade credit (see letter T) to your customers, the sooner you get paid, the better your cash flow will be. Incentivize your customers to pay early by offering rewards. One of the most common rewards is to offer a discount on the invoice if a customer pays within a specified period of time.

S – Software: Making sure your AR process is top notch from beginning to end means also taking into account where you’re invoicing customers from. There is a lot of great small business accounting software out there, and you should really choose the software based on what’s best for your type of small business. It’s definitely worth finding a software that lets you send both printed and online invoices, as well as allowing you to accept online payments.

T – Trade Credit: Extending trade credit is when you allow a customer extra time to pay an invoice. The most common terms are 15, 30, or 60 days. If you financially able to, extending trade credit is a great way to increase your customer’s buying power and build loyalty. If you need the cash before your customer’s payment due date, you can either finance the invoice or incentivize them to pay early with a discount.

U – Urgency: The fact is, the longer you wait to get paid, the harder it is to collect. In fact, invoices that are over 90 days past due are nearly impossible to collect. That’s why, as soon as an invoice becomes past due, you should take immediate action. Call the customer, follow up by email and a letter, and stay persistent until you receive the check, finance the invoice, or turn it over to collections.

V – Verification: Responsible business practice dictates that before you extend credit to a customer, you should first verify that they have a good credit and payment history. The easiest way to do that is to set up an account with a Business Credit Bureau. There are dozens of companies that will provide a customer’s credit history for a fee but the most well-known is Dun & Bradstreet.

W – Working Capital: In short, working capital is calculated by subtracting your current liabilities from your current assets. In other terms, how much cash do you currently have to operate? Monitoring this figure is extremely important in receivables management, as you need to know how lenient you can be with your payment terms. If you have a lot of working capital, you can extend longer terms. If your working capital is tight, you should only be operating on shorter payment terms.

X – The X-factor: When it comes to extending credit to customers, always remember that you are in control. It’s up to you to decide if and when a customer is no longer eligible for trade credit. The x-factor that you use to make a decision that is best for your business can be based on anything from payment history to a deteriorating relationship to a general gut feeling.

Y – You: When you’re managing receivables always remember this: you never have to do anything you don’t want to. You don’t have to extend credit to customer if you don’t feel right about it. This is YOUR business. YOU did the work and YOU deserve to get paid. You should never feel bad about calling a customer about a payment. It’s what you’re rightfully owed. Even if you finance an invoice or send it to a collections agency, don’t sweat it. YOU are running the show here and YOU have to do what it takes to be paid. End of story.

Z – Z-Score: A Z-Score is a calculation based upon five financial ratios that can be used to measure a company’s credit risk. A company’s receivables are included among the assets used to calculate the score. It is also used by invoice financing companies in determining the financial health of account debtors.

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Find out more info on the Receivables Exchange and how to turn invoices into cash by using accounts receivable financing to generate working capital. Connect with Funding Gates, the world’s first CRM for receivables management, and sign-up for an online credit department for your small business.

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Photo: Blanco

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