Accounts receivable (commonly referred to as AR) is simply money owed to you by your customers.
Because cash flow is the life blood of a business, it is vital that you have strong collections processes in place to ensure you get paid what you’re owed as soon as possible.
A lack of processes and systems around AR can cause undue stress, wasted time, and unnecessary costs to a business.
So, how do you know if your accounts receivable collection systems are broken (or could use improvement)?
Answer yes or no to the following questions to find out:
- Do you or someone in your office need to call customers who are past due on their invoices to remind them to pay you?
- Is your late statement mailing a manual process?
- Do you or someone in your office physically mail paper invoices to all your customers, regardless of their preference?
- Do you or someone in your office ever lose checks from customers?
- Have you or someone in your office forgotten to deposit checks at the bank, or deposited them more than one day after they were received?
- Do you have customers that pay late or never at all?
If you answered yes to any of the above statements, you have a problem that could be costing you thousands of dollars or more a year. Not to worry—awareness is the first step to making a change.
Keep reading for tips to improve your accounts receivable systems and processes.
1. Build a strong foundation
Customer service should be considered at every stage of your business, especially when it comes to collecting accounts receivable. It’s important to make sure that you have done everything in your power to make it easy for your customers to pay you.
Don’t be afraid to get to know your customer and ask them questions. For example, you can ask about the payment cycle they prefer. If they get paid on the first of the month it may be beneficial to make sure your bill is due the same week. Additionally, having (recorded) conversations with your customer can help you monitor customer satisfaction and eliminate a customer not wanting to pay because they’re “unhappy.” A simple customer-centric conversation could further your relationship with your customer and save time and money for you in the future.
2. Accept online payments
Make sure you accept credit cards, eChecks or ACH payments, online payments, and recurring payment options. If you’ve ever purchased something from Amazon, you’ve experienced first-hand one of the easiest shopping experiences that exists today.
One-click ordering makes it easy for the customer to pay them. Now they even have physical buttons you can put throughout your home so a purchase is literally one click away (no need to click buttons on your phone or computer to spend your money). Ask yourself, “What would Amazon do?” and try to get payment options as simple as theirs.
3. Incentivize the customer behavior you want
Don’t forget that you have the power to incentivize the behavior you want. People love saving money so consider discounting your prices or offering other special offers for people that pay early, pay by credit card (if that’s what you prefer), or set up recurring ACH payment plans.
If you’re concerned about the added fees business owners must pay to accept credit cards, or the added cost of giving incentives, consider adjusting your prices up to take those fees into consideration.
Human behavior suggests people would much rather purchase a $100 item that’s 20% off (for a total price of $80) than a full priced $80 item even though the end price is exactly the same.
4. Think about your business processes
Depending on your industry and business, you may be giving more power to your clients than they expect or need.
Many businesses operate by agreeing to do work for a client for a given price, delivering the work, and then billing the client. In this example, the client has all the power because the work has already been done, but they haven’t paid anything and they could easily pay late or not at all. If this happens to you, a simple solution is to require up-front payments before you deliver your service or product.
Another option is to put your policy terms and dates in writing. Your policy should include:
• What work you intend to do
• How often payments need to be made
• How payments dates are determined for your business
Most importantly, the policy should include steps for your customer to follow if they’re not happy with the product or service (rather than just deciding not to pay).
Finally, if you’re collecting accounts receivable and payments are consistently late, you may want to rethink who you extend credit to. Make sure you require credit applications before giving people options to pay any time after the service or product has been delivered. Furthermore, if you do extend credit you still may want to require a deposit to ensure the client intends to pay.
You may not like the idea of turning customers away if they don’t qualify for credit or can’t pay for the deposit, but believe me, if they weren’t planning or able to pay you, they’re not a customer you want.
5. Leverage technology
Paper invoices can work, but they cost more for you (time, supplies, postage), they’re easy for customers to lose, and they clutter their homes and office. By leveraging technology, sending e-invoices, and accepting online payments you make it quick, easy, and less expensive for people to pay you (remember the “what would Amazon do?” example).
These days, online tools can also automate sending invoices and bill reminders so you don’t have to call your customers to remind them to pay you. Rather than having or hiring dedicated staff to manage your AR, you can employ more front-line employees that can bill clients and increase your bottom line.
6. Follow up with the appropriate amount of directness
Even best laid plans often go awry. So, what do you do when you your newly streamlined accounts receivable system still doesn’t prevent all late payments?
Stay calm and follow these steps:
- The first overdue letter or call should be helpful
- The second should show concern
- The third, politely punitive
Follow up with any stated means for payment, whether it’s a final invoice, small claims court, or, in dire situations, seeking the help of a professional debt collector. Stick to the guidelines you set or you run the risk of your customers not taking them seriously.
7. Keep all correspondence, phone calls and means of redress absolutely professional
The guidelines set by the FDCPA protect the rights of the customer to be treated fairly in debt collection. You might feel justified in making an example of your non-payer online or in some public way, but it’s not productive and it makes other customers think twice about working with your business. Additionally, you could get sued for harassment or defamation.
8. Know when to let it go
If you’ve gone through small claims court, hired a debt collection firm and still haven’t received payment, you need to decide if it’s costing you more to pursue this debt than the actual amount you’re owed.
Typically there are three types of non-paying customers:
- Cash-strapped (want to pay but can’t)
- Purposefully late (want to extend paying as long as possible)
- Non-payer by nature (never intend to pay and will make up any excuse not to pay)
In most situations, your customer will be willing to make good on their debts to you. Keeping a positive attitude and treating the customer with respect is key in collecting this payment and, hopefully, all future payments from the customer. When in doubt, talk to a professional debt collector or a business attorney to find the appropriate next steps in debt collections.
If you’re interested in learning more about the benefits of using PaySimple to collect payments online, give us a try.
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