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Proactive Approach to Lower Accounts Receivable

Customer payments get delayed all the time. It may not always be worrisome right away, but not having an accounts receivables strategy can be devastating for your business.

Consumers and businesses alike have ups and downs, and their financial situation can temporarily or permanently deteriorate. If you have outstanding AR from your customers, it is crucial to get paid on time before they prioritize other payments over yours.

Firstly, you must learn to overcome the hesitation of reminding your customer of a missed payment promptly. It is possible that it was just an oversight on their part, but there is always a possibility that they have a financial crunch. They could be owing other bills just like yours.

Secondly, there is nothing wrong with sending invoices twice a month, and a phone call to the concerned person will ensure that you have done everything to maintain a healthy AR. We prefer emailing the invoice, followed by physically mailing the same invoice ten days later, followed by a phone call to the concerned person after another ten days. It means in 1 month you would have contacted them thrice (by email, mail, and phone call). The process should repeat for at least 2-3 months until you get paid.

Lowering accounts receivable is essential for improving cash flow and reducing the risks associated with late or non-payments. A proactive approach involves implementing strategies that will reduce the amount of money owed to your business by clients or customers before it becomes a problem. Here’s how you can be proactive in managing and reducing your accounts receivable:

  1. Credit Policy Evaluation: Regularly evaluate your credit policy. This includes reassessing credit limits, conducting background checks, and analyzing the creditworthiness of new and existing customers.
  2. Clear Payment Terms: Clearly state your payment terms on invoices and contracts. This includes the due date, late payment penalties, and any discounts for early payments.
  3. Invoice Promptly and Accurately: Send invoices as soon as goods or services are delivered. Ensure that the invoices are accurate, detailed, and include all the necessary information for the customer to make payment.
  4. Electronic Invoicing and Payments: Adopt electronic invoicing and offer multiple payment options, making it easier and faster for customers to pay.
  5. Regular Follow-ups: Keep a consistent schedule for following up on unpaid invoices. Start with a polite reminder as the due date approaches, and maintain communication if the payment is late.
  6. Maintain Relationship with Customers: Maintain a positive relationship with your customers. Understanding their business and any issues they may be facing can help in negotiating payment plans if they are experiencing financial difficulties.
  7. Train Staff in Accounts Receivable Management: Ensure your staff is well-trained in accounts receivable best practices. They should be knowledgeable in your policies and be able to handle communications with customers effectively.
  8. Monitor Accounts Receivable Aging Reports: Regularly review accounts receivable aging reports to identify overdue accounts. This helps to prioritize collection efforts and spot trends that may need attention.
  9. Offer Early Payment Discounts: Provide incentives such as discounts to customers who pay their bills before the due date.
  10. Implement a Dunning Process: Establish a structured communication process that escalates in tone and urgency as an account becomes more overdue.
  11. Outsource or Utilize Collection Agencies: For severely overdue accounts, consider utilizing the services of a collection agency or outsourcing the accounts receivable process. Also, assess your dependency on this customer and prepare for an alternate strategy. If your invoice is 90-120 days old, I do not doubt that most of these accounts should be forwarded to a collection agency.
  12. Regularly Review and Optimize Processes: Continually review your accounts receivable processes for efficiency. Make necessary adjustments based on what’s effective and what’s not.
  13. Use Technology Solutions: Implement software that automates the accounts receivable process. This not only saves time but also minimizes errors and provides valuable data for analysis.
  14. Cash Flow Forecasting: Regularly forecast cash flow taking into account your accounts receivable. This will give you a better understanding of your financial health and allow you to make informed decisions.
  15. Document and Enforce Policies: Have a documented policy regarding accounts receivable management and ensure that it is consistently enforced.

By being proactive in managing your accounts receivable, you can lower the outstanding balances and improve the financial health and sustainability of your business.

 

 

 

 

Filed Under: Debt Recovery

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