Get Paid Faster: 10 Strategies for Managing Accounts Receivable
Effective accounts receivable management is the cornerstone of financial stability for small businesses. You've poured your heart and soul into your business, delivering top-notch products or services and cultivating strong client relationships. But when it comes to getting paid, delays and complications can quickly turn your success story into a cash flow nightmare.
Managing accounts receivable (A/R) isn't just about chasing payments; it's about creating streamlined processes that prioritize prompt payments while maintaining positive client relationships. In this fast-paced business landscape, where every penny counts, having a solid grasp of your accounts receivable is non-negotiable.
Small business owners wear many hats, but mastering accounts receivable is one hat that can't afford to slip. It fuels growth, supports operations, and ensures financial stability. From setting clear payment terms to implementing automated systems, every aspect of A/R plays a vital role in your business's success.
Below, we'll explore proven strategies for managing accounts receivable effectively. Whether you're a solopreneur or leading a growing team, these accounting best practices will empower you to take control of your finances, optimize cash flow, and pave the way for long-term success.
1. Set Clear Payment Terms & Policies
Creating clear payment terms and policies is the first step toward effectively managing your accounts receivable. You should generate credit policies defining:
Which clients are eligible for net terms (e.g., net 15, net 30, etc.)
Which customers must pay in full at the time of purchase
Payment schedule, if applicable (e.g., monthly, milestone, or 50/50 billing)
Ideally, you’ll communicate these terms whenever you land a new client. However, you might need to share them with existing clients if you update your policies. If you have ongoing, long-term clients, sending an annual reminder of the payment terms is also a good idea.
A credit policy is crucial because it helps mitigate the risk of giving credit to customers who may default on payments. Plus, it makes it easier for you and your team to ensure consistency in how credit decisions are made across different customers and transactions.
2. Know Your Revenue & Billing Sources
As far as bookkeeping best practices go, understanding where your revenue is coming from and which billing/payment methods are being used is a must. This information is critical for effective A/R management and your overall financial health.
First, knowing the revenue breakdown by billing/payment methods enables you to track outstanding invoices, monitor payment trends, and identify any issues or delays in payment processing. This information helps prioritize collection efforts and implement strategies to improve accounts receivable turnover.
Additionally, these insights can equip you to diversify your income streams. By understanding which products, services, or channels generate the most revenue, you can allocate resources more efficiently and explore opportunities for growth in profitable areas.
You can even use this data to tailor your invoicing and payment processes based on what your customers use most. For example, if a significant portion of customers prefer using Square or Etsy for purchases, you can ensure seamless integration with these platforms to improve the customer experience and expedite payments (more on this in the next step).
Pro Tip: Stay organized by taking photos of your deposits and tracking them individually. Avoid depositing multiple transactions together to mitigate confusion!
3. Ease Invoice Management & Payments for Customers
The easier you make things for your clients, the faster and more likely they’ll pay! You can do this by:
Sending invoices promptly after delivering goods or services
Offering various payment methods such as credit/debit cards, online payment gateways, bank transfers, and mobile payment apps
Implementing automatic payments (especially for recurring services or subscriptions)
Sending payment reminders a few days before invoices are due (most software allows personalized reminders)
Create online portals where clients can access invoices, make payments, and track their account balances conveniently
Pro Tip: While e-commerce businesses don’t use invoicing, service-based businesses send invoices for everything—which should be monitored and recorded carefully.
4. Offer Incentives for Early Payment
If your business can afford it, offering discounts or incentives for early payment can be very beneficial. For example, you might offer a 2% discount for paying within 10 days or a slightly higher discount for paying the total cost upfront instead of monthly.
This can equate to significant savings for your clients—which also means happier clients. Plus, it can help increase your cash flow.
5. Implement Automated Systems
Another way to ease the accounts receivable process for your business and your clients is to implement automated systems. A/R software can streamline many of the steps mentioned above, creating a smoother process for both parties by:
Ensuring you get paid faster thanks to auto-scheduled invoices and reminders
Speeding up the process thanks to invoice matching and payment posting
Connecting all of your platforms (i.e., ERP, CRM, billing) and teams (i.e., accounting, sales, leadership)
These platforms provide one centralized location where your whole team can easily find essential data, allowing more efficient and effective communication.
6. Follow Up on Overdue Invoices
When it comes to accounts receivable best practices, promptly following up on overdue invoices is vital. To do so without damaging client relationships, you’ll need a plan so your accounting team knows how to handle late payments.
Here’s an example of what this outreach process might look like:
Late Notice Email #1: Sent to all customers that are one week late
Late Notice Email #2: Sent to those who have not paid after another week
Phone Call: Made to accounts that are a month past due
Escalation: Determine if the delinquent account should be addressed by a manager or to collections
You’ll probably find that most clients will remit late payments ASAP, so the sooner you notify them, the sooner you get paid.
7. Establish a Collections Process & Penalties
If you’ve done everything you can from the previous step, it may be time to escalate the issue. Having a procedure in place for delinquent accounts can ease this unpleasant process by ensuring fairness and consistency across all clients.
If they still don’t pay after your A/R team’s follow-up steps, you may need to send more direct communication informing the client of potential legal action if they don’t submit payment by the due date.
Requiring deposits upfront and establishing a late payment penalty can also help prevent things from reaching this point. Collecting deposits before starting work protects your time, energy, and business. And charging interest on late payments will encourage clients to pay on time.
8. Consider Your Client Base & Cash Flow
With each new client you bring on, you should assess whether they will be a good fit—and those considerations should include your accounts receivable. You don’t want to waste time and resources chasing unpaid invoices.
Consider conducting credit checks on new clients to evaluate credit risk and ensure they fit your business well. Then, inform them of your payment terms during onboarding (refer back to Step 1).
Additionally, carefully consider each client's size and the payment terms you offer them. For example, you may have a few large customers for whom you provide longer payment terms (e.g., 90 or 120 days). However, you should also have enough smaller clients who pay on 30 or 45-day terms to ensure sufficient cash flow.
9. Offer Payment Plans
If you sell high-ticket services or products, providing payment plans from the start could make your offerings more affordable for customers and ensure they don’t fall behind on payments. It also means you’ll receive consistent income regularly, which can help with budgeting.
However, you may occasionally have clients who purchase your goods or services and then experience financial difficulties. In these cases, you might offer a payment plan to allow them to become current on their accounts and maintain a positive relationship.
It all comes down to balancing flexibility and protecting your small business.
10. Implement an A/R Aging Report & Calculate A/R Turnover
Every small business should implement two specific accounts receivable processes: the A/R aging report and calculating accounts receivable turnover. This data can provide valuable insights into the health of your finances.
To create an aging report:
Compile a list of all outstanding invoices, including the invoice date, due date, total amount owed, and payment status.
Group outstanding invoices into different aging categories based on how long they have been outstanding. Standard aging buckets include 0-30 days, 31-60 days, 61-90 days, and over 90 days.
Calculate the outstanding balance for each aging category by summing the total amounts owed for invoices within each time frame.
Use Excel or your accounting software to create a tabular report that displays the aging categories and the corresponding outstanding balances.
Review the A/R aging report regularly to monitor receivable aging, identify overdue invoices, and track trends over time. This helps prioritize collection efforts and address potential cash flow issues.
Finally, your A/R turnover (ART) ratio indicates how efficiently your company manages its accounts receivable by calculating how many times during a specific period (usually a year) the company collects its average A/R balance. To calculate your ART:
Choose a specific period for which you want to calculate accounts receivable turnover (e.g., monthly, quarterly, or annually).
Add the A/R balance at the beginning of the reporting period to the A/R balance at the end of the period, and then divide by 2 to calculate the average accounts receivable.
Determine the total credit sales made during the reporting period, excluding any cash sales or sales made on credit to employees or affiliates.
Divide the net credit sales by the average accounts receivable to calculate the accounts receivable turnover ratio. The formula is: Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable.
A higher accounts receivable turnover ratio indicates that receivables are being collected more quickly, while a lower ratio suggests slower collections. To assess performance, compare the turnover ratio to industry benchmarks and historical data.
Implementing an A/R aging report and calculating your ART will empower you to manage your receivables better, improve cash flow, and make informed decisions about credit policies and collection strategies.
Professional Accounts Receivable Management
The main takeaway: Make payments as easy as possible for clients and take advantage of automation! You'll mitigate late payments and unpleasant customer conversations with a solid accounts receivable process and the right tools.
If your business is growing and your team simply doesn’t have the bandwidth to handle accounting responsibilities like accounts receivable management, it might be time to bring in the pros! On top of A/R, an outsourced accounting firm like JLS Accounting can take on all bookkeeping and finance tasks, providing you with essential insights into your company’s performance while freeing up you and your team members to focus on core duties.
Does this sound like what you need? Book an intro call with us today to learn how we can ease your stress around the numbers!