When you run a business, making sure you have complete control over the cash coming and going from your business is the key to success.
Managing Accounts Payable
The money you owe someone else is referred to as your “accounts payable.” Whenever you are working with a number of vendors, it can be hard to keep up with whom, how much, and for what you owe. If you push off resolving your accounts payable, your relationships with these vendors might suffer and you could cost yourself more administrative time in clearing out these payments. In order to save yourself stress and time, here are some ways to streamline and get in front of your accounts payable.
1 – Manage Accounts Payable on a Daily Basis
Even with software like QuickBooks, the data entry process can’t run itself. If you’re the type to set bills and receipts aside until you have time to do them, consider changing your mindset and switch to a proactive process. You’ll save hours trying to remember what you bought and when by just entering a few lines of expenses or a new invoice at the end of the day when you’re closing up shop.
2 – Create Consistency
Establish a basic accounting workflow whether it is for yourself or someone else. This will ensure that everyone who invoices you is entered into your accounting system in the same way. Once you start a new vendor relationship, make sure that you have a W-9 on file for them and that checks are always issued from original invoices. If for some reason, you have a copy or an amended invoice, those invoice numbers and dollar amounts should follow each other so that you don’t lose track of what you owe and so you can also track what a vendor says they are owed. In addition to what is entered into the accounting software, keep paper copies or scans of invoices so that you have a record on hand to go back to.
3 – Break Down Expenses on a Regular Basis
Another part of actively managing vendor relationships is uncovering opportunities or challenges in your cash flow. Are you taking advantage of any discounts offered by vendors? Are you consistently late on certain relationships? Are vendors constantly late providing you with invoices? Taking a look at this part of your cash management will help you avoid wasting money and time. Look for ways to cut a better deal on services, either by asking for a discount outright or looking for competitors that may be cheaper. Performing a business review and then breaking out your expenses on a quarterly basis will help you plan ahead and make sure that you don’t fall into the trap of paying for something you no longer need.
4 – Get Two Signatures
This may be a little harder if you’re a one-man show, but it is worthwhile to have multiple eyes on a balance sheet before doing a check run. Keeping the number of check runs to two per month can make things easier to track for both you and anyone helping. If you’re taking in invoices, tracking expenses and then writing checks, it’s much more likely that you’ll make an error. Software solutions can help prevent this by creating audit trails and helping with the math. Consider employing a CPA on a quarterly basis to give your books a once over.
Managing Accounts Receivable
The money someone else owes you is referred to as “accounts receivable”. It’s about accessing the cash you’ve earned. It’s not always the easiest process, but it’s one of the most important. Managing your open invoices is important to feeling and being in control of your cash flow.
1 – Get Organized
If you are going to excel at accounts receivable management, you have to start from the very beginning. Be diligent in every step of the process and, most importantly, in whom you decide to extend credit. Net terms aren’t for everyone. Start by setting up a professional credit application that gives you a chance to get as much info as you can on these customers. Use this info to vet them so you are making proper credit decisions. Once you’ve decided to move forward on credit with a customer, be sure you have a contract that clearly states the terms you are operating on and that the customer knows when they must pay you. Also, be sure you have a way to keep track of your accounts and get your invoices to customers as seamlessly as possible.
2 – Watch Your Language
When it comes to invoices, the wording you choose to include can affect the timeframe in which you receive the check. For example, by including a “please” or “thank you”, you can increase your chances of getting paid by over 5%. Also, if you avoid jargon such as “net terms” and are more specific with a phrase like “14 days to pay”, you’ll get paid faster.
3 – Start Early
Don’t wait for the customer to pay. Create a system that allows you to remind customers when they have a payment coming up. If it is a week before the payment is due and you still haven’t received the check, send the customer a friendly email simply reminding them of the due date and how you accept payment.
4 – Remind, Remind, Remind
Your customers might not know their payment is late if you don’t tell them. Believe it or not, some of them haven’t paid because they just simply forgot. It’s your job to make sure this isn’t the case. As soon as the payment is past due, get a reminder letter in the mail. However, don’t just use a generic letter. Be crafty and sculpt the letter’s language to be appropriate for the situation. If someone is a chronic late payer, you might want to step up the severity; whereas if it’s someone’s first time, keep it friendly.
5 – Collection Call
After you send a past due letter out and still haven’t received payment, it’s time to get on the phone with the customer. It’s important that you keep your emotions in check and don’t let the customer run the conversation. You need to prepare for the call and be ready to accomplish your goal.
To do this, follow these tactics:
• Be specific
• Be positive
• Be professional
• Be in control…but also be flexible
• Be committed to finding a solution
6 – Prepare for Excuses
The hardest part of the collection call is listening to the customer’s different excuses for not paying. No matter what, you have to be prepared to confront these. Although (in some cases) it is easy to sympathize, accounts receivable management is about action and you must require some from the customer. Get acquainted with the most common late payment excuses and learn how to respond to each one. Practice makes perfect and helps you get paid.
7 – Installment Plans
When you do come across a customer who seems to be in a financial hard spot and you really would like to help them out, installment plans are key. Having a customer pay you back in smaller amounts over time is MUCH better than a customer not paying you back at all. It will get cash in your pocket immediately and will help build your relationship with that customer. Work with the customer to create a payment plan that works for both of you. Ideally, it would be great to always receive all of your money up front but, when you can’t, be creative in how you can help the customer pay you.
8 – Finance Charges and Rewards
Incentives go a long way, no matter what you are doing. Consider this when it comes to accounts receivable management. Are you adding finance charges for late payments? Are you giving customers a discount if they pay early? Whether it is to have consequences for paying late or rewards for paying early, give customers a little push to get that cash to you on time (or early). It’s worth it, especially to see what kind of effect it has on your payments. If you are considering adding a finance charge, check your state’s usury laws to make sure you are not overcharging.
9 – Outside Resources
You still need to know when to turn for help. There are many things you can do to get help with late payments or delinquent accounts. Consider reporting late payments to the credit bureaus, which will affect those customers’ credit scores. Knowing you are reporting will certainly motivate them to pay next time. If you have particularly large or repeatedly delinquent accounts, consider calling a debt collection lawyer to help take legal action. And if you need cash fast, look into receivables factoring, which will help you get your hands on cash while a factor pursues your late payment.
For more information like this, download our free guide
Small Business Guide to Financial Management
- How to gain financial awareness through cash flow forecasting
- How to discover more revenue in your existing customer base
- The 5 easiest ways to shrink your business spending
- How to ace accounts payable and receivables management
- The smartest investments for your business
- …and much more