How to Improve Your Accounts Receivable Process
Whether you’re struggling with accounts receivable process issues or simply want to improve the financial health of your business, you have lots of options to get things on track. On this page, we’ll dig into a few proven receivable management strategies that will help you get invoices paid faster and with less effort.
Why Should You Improve Your Accounts Receivable Process?
Per the Small Business Administration (SBA), just half of all small businesses make it to the five-year mark. Working capital issues are cited in the majority of closures. But, the benefits of addressing cash flow issues go beyond keeping doors open. With the right strategies, your business can gain an edge over competitors and grow too.
Cash flow is shaped by two things—your inflows and outflows transactions. You’ll need to optimize both to ensure you have the working capital your business requires to cover expenses and grow. As a primary component of your inflows, or perhaps the sole source of all your inflows, your accounts receivable is the ideal place to start.
Steps for Improving AR Processes
Business owners can use the seven steps outlined here to build collection-boosting power into each stage of the accounts receivable processes.
1. Calculate accounts receivable turnover with an AR aging report.
Before you can begin improving anything, you’ll need to get a better understanding of where your company sits today and your client’s payment history.
Pull your AR report.
If your company uses software for invoicing, tracking balances, and posting client payments, you should be able to get an accounts receivable (A/R) aging report from your accounting software easily.
Have the report break balances down by age in groups such as:
- 0-30 days old
- 31-60 days old
- 61-90 days old
- more than 90 days old
Calculate your Accounts Receivable Turnover (ART) ratio.
Your ART ratio will tell you the number of times per year your business collects its average accounts receivable. It’s a measure of how efficiently you collect on the credit you offer customers through your invoicing process. Calculating it is a two-step process.
Step 1: Beginning accounts receivable + ending accounts receivable / 2 = net accounts receivable
Step 2: Net credit sales / accounts receivable = accounts receivable turnover
So, let’s say you do the math for your company, and your ART is 9.3. That means your receivables turn over 9.3 times per year. You can also convert that into days as follows:
Receivable turnover in days = 365 / Receivable turnover ratio
In this example, 365 / 9.3 = 39.2. It means your average customer takes 39 days to pay their invoice. Naturally, the higher the ratio or, the lower the number of days to pay is, the better it is for your company’s financial health. Once you have this information, you can start taking steps to improve it and monitor your progress with spreadsheet templates.
2. Try and collect unpaid invoices as quickly as possible.
The older a balance is, the less likely you are to receive payment. Slow payments also impact your ability to operate and grow. With this in mind, collecting on unpaid balances as quickly as possible is paramount to the health of your business.
3. Make sure clients are aware of when their payments are due.
Effective collections begin before credit is extended to a client. Ensure the customer knows when the balance will be due before completing work or delivering goods by verbally explaining it and including it on your credit limit and payments plans in the contracts. Due dates should also be prominently listed on invoices. Many companies also send a reminder a day or two before the due date if payment hasn’t been made yet.
4. Offer payment incentives.
Incentives encourage clients to pay in a timely manner and improve the collection process. Reward clients for timely payments and have consequences in place for late payments. A few examples include:
- Pre-payment discounts.
- Early payment discounts.
- Interest on late payments.
- Monthly or weekly flat fees for late payments.
5. Establish good relationships with your customers.
If you have good relationships with your customers, they’ll want to keep their accounts in good standing to maintain the relationship–clear communication when billing is a huge part of customer relationship management. You should also have a written process for handling delinquent payments that involve reaching out to customers to find out why the payment is late and make arrangements, as well as a dispute resolution process to ensure any issues are managed swiftly.
6. Automate your accounts receivable systems.
Repeat communication is crucial. To speed things up, you may want to send several payment reminders at different points:
- Prior to delivery of services or goods to offer a pre-payment discount.
- The day delivery occurs to accelerate payment and potentially offer an early-payment discount.
- A few days before the payment due date to remind your customer their balance is coming due and encourage them to avoid late payment penalties.
- When a payment is a day or two past due, let them know their payment date has passed and inform them of any new charges.
- Each time additional charges accrue with updated balance information and/or with each billing cycle.
You’ll want to automate these messages for greater efficiency. Consider layering in multiple payment methods and digital payment options too. With an end-to-end automation solution, your clients can receive electronic invoices and pay online upon receipt, eliminating payment barriers and improving customer service while boosting cash flow for your business at the same time.
7. Sustain a healthy cash flow and consider invoice factoring.
Sometimes businesses can’t improve ART or cash flow sufficiently, even with these additional measures in place. For example, if you’re a small business owner in the B2B niche and your invoices must be approved by multiple people before they’re paid, or you serve an industry in which 90-day payment terms are standard, getting your ART below 12 may genuinely be impossible.
Options like invoice factoring can help in these cases. You’ll simply sell your unpaid invoices to a factoring company that advances you most of the invoice’s value right away. You’re free to apply the funds however you wish and can move forward while the factoring company waits for payment.
Turn Your Invoices into Instant Cash with Charter Capital
Want to accelerate payments through the accounts receivable process with factoring? With a fast and easy approval process, same-day funding, and low rates, Charter Capital is the missing link in your accounts receivable optimization strategy. Request a free rate quote to get started.
Co-founder and Executive Manager at Charter Capital with a history of 28 years working in the financial services industry. Skilled in Cash Flow, Leveraged Finance, Factoring, Mergers & Acquisitions (M&A), and Structured Finance. Strong business development professional with BA from The University of Texas at Austin and MBA of International Business from University of South Carolina.