Maintaining consistent cash flow is always a top concern among small- to medium-sized enterprise (SME) owners. After all, unlike larger businesses that can likely shoulder shortages, SMEs have limited capital and thus need to maximize cash flow to keep operations afloat. To do this, they need to ensure that any and all accounts receivable (AR) are promptly collected to access the funds needed to keep their business running.
An accounts receivable refers to the money that customers owe a business and have yet to be paid. This often happens when the goods or services are provided on credit. For instance, if your small pastry business is regularly supplying a local cafe, you may opt to just invoice them for the goods and receive the payment at the end of each month for convenience. The invoice payment the cafe owes you at the end of the month is then considered an AR.
Given the delayed nature of ARs, it is possible that some invoices and due payments may be overlooked as you get busier with managing other aspects of your business. To prevent this from happening, having an efficient system is a must to stay on top of your receivables. Here are some ways to improve your AR management practices to make sure you can avoid cash flow shortages.
1. Set Clear Payment Terms
Vague or incomplete invoices often lead to delayed payments, which is why it’s crucial that you set clear payment terms right off the bat. Your invoice should include a list of the goods or services provided in the transaction, their total amount, and the payment due date. Then, upon issuing this invoice, make sure that customers acknowledge and agree to your terms. By setting clear payment terms and expectations, you can avoid any misunderstandings and ensure that customers are well aware when their payments should be settled.
2. Invoice Promptly and Accurately
Make it a habit to send invoices immediately after delivering goods or services to prevent payment delays or missing invoices entirely. Always double-check the details included in the invoice as well to avoid disputes or conflicts with customers. Sending timely invoices keeps your records as accurate as possible and lets you note any cash flow you can expect in the future, which can be helpful in projecting budgets for expenses.
3. Offer Multiple Payment Options
Providing flexible payment methods increases the likelihood of customers paying on time, which makes AR collection hassle-free on your end as well. Digital payment options through a mobile business banking account or e-wallet where customers can send their payments makes the process more seamless and convenient for everyone involved. You can also set up online invoicing systems that allow one-click payments, further making it easier to collect payments from customers.
4. Implement a Follow-Up System
Most delayed payments are often resolved with proper communication with customers. However, it can be difficult to keep track of multiple ARs while also attending to other business matters. To lessen the work needed on your end, you can set up a structured follow-up process to ensure that no outstanding payments will slip through the cracks. Accomplishing this efficiently may require using invoicing software with an automated follow-up reminder feature so you wouldn’t have to worry about checking which ARs are due and writing individual reminders for each one.
5. Enforce Late Payment Penalties
Late payment penalties are strong reinforcements for customers to pay on time, as they’d like to avoid having to pay more for your services. Thus, don’t hesitate to include late fees as part of your payment terms and make sure you specify them clearly on your invoices. This can make your AR management less stressful as more customers are encouraged to pay within the deadline.
6. Offer Incentives for Early Payments
In the same vein as the previous point, providing early payment incentives in the form of small discounts can also be a worthwhile strategy. Not only will the cash flow from early payments help you with your other expenses, you also encourage a habit of paying early among your customers and make AR management much easier. State any early payment discount on your invoice as well so customers are well-informed about the incentive, giving them more reasons to settle the bill ahead of time.
7. Use an Invoicing Software
Acquiring invoicing software for your small business can be a gamechanger when it comes to managing your ARs. Rather than manually creating invoices and tracking your ARs, you can instead rely on the software to generate invoices automatically and track each one depending on their due dates. Most invoicing software often come with a user-friendly dashboard where you can monitor AR figures such as how many invoices are already settled or your current cash flow status.
Effective AR management as a small business owner can be challenging, but certainly not impossible. All you need to do is to be strategic in the way you handle accounts receivables by coming up with ways to encourage timely payments among customers and staying on top of outstanding invoices. With the tips above, you can surely accomplish both, ensuring that your business remains financially stable.
