Your business relies on a steady cash flow in order to pay your employees and stay in business. There are a lot of basic expenses that go into running your business – building fees, utilities, supplies, and payroll. Accounts receivable management is the main source of a business’ cash flow. In this area of your business it is important to have a schedule for invoicing and follow-up. If an AR department has issues invoicing on time or getting invoices paid, you may find that your cash flow steadily decreases. If you’re worried about a decreasing cash flow or if you’re simply looking to be more proactive in protecting your bottom line, consider the following strategies.
If you notice a decline in accounts being paid, it may be time to reevaluate this area of your business. By measuring the performance, you can find where improvement is needed. Look for areas that give you the opportunity to streamline practices.
During the evaluation process, consider these questions:
- What percentage of invoices issued monthly are paid on time compared to paid late?
- Did clients take advantage of early pay discounts?
- Do you offer payment incentives?
- How many clients underpaid on their invoice? Is this due to an authorized payment plan?
- What percentage of unpaid invoices is sent to collections after 90 days?
- Which customers always pay late?
- Are invoices being sent directly after they are issued?
Collecting Evaluation Data
You can keep it simple and use an Excel spreadsheet to track the data from your evaluation questions. Some accounting programs have the capability to track this sort of data. Check your program to determine if it does. When setting up your Excel spreadsheet consider using two separate tables for these key areas:
Age of Accounts – Accounts Receivable (A/R) aging can be grouped by monthly time frames. In your accounting software, you may see this as the R base or the R aggregate. This will give you a clear picture of how long it is taking for you to get paid. You can see where each client stands and you’ll be able to see a pattern in their payment habits. The aging schedule organizes balances by 30-day increments: less than 30, less than 60, less than 90, and more than 90.
Paid with Discounts – Many customers will take advantage of early pay-off discounts. Example: 10/15 net 30, this means that you are offering a 10% discount if the invoice is paid off in 15 days. If the invoice is not paid in that time frame, then the client must pay the balance within 30 days without receiving the discount. In some instances, customers apply the discount after the discount deadline. While it may not typically happen, too many customers take advantage of the terms of the discount offer leaving you losing 10% on multiple accounts. It’s important that you pay close attention to your discounts and how they’re being utilized. Ensure that these discounts are the best option for your business.
When all the numbers are compiled, you can generate a chart showing the areas that need improvement and the areas where your company is performing well. This information will make it easier to address your back office process and procedures that are not working. Work with your staff to create an effective plan. Take time each month to review your accounts with your staff. Follow-through is important.
Clients ARM Can Help
At Clients ARM, we offer our clients a variety of services that can save you time, money, and grow your business. We offer a free process review that will assess your entire accounts receivable process and how it can be streamlined. We aim to improve your process to help minimize future delinquent accounts. Clients ARM can free up time for business owners so that they can focus on the most important aspects of their business: generating revenue.
Client’s ARM is familiar with the laws regarding collections on both the federal and state level. We are licensed in multiple states, and we have a collections rate of 90%. If you’re ready to find out how much working with Clients ARM can save you, contact us now. Put our 30+ years of experience to work for you!