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Small business owners spend too much time collecting accounts receivable (AR), rather than running their business — I’m not criticizing, I get it. As a small biz owner myself, I’ve had the same struggle.

But here’s the thing: I don’t have that problem anymore. This is my advice for how to manage accounts receivable — oh, and PS, it doesn’t involve you hiring extra help.

Common AR Challenges 

If you’re one of the many entrepreneurs and small business owners who spend over 36% of your week taking care of small administrative tasks like invoicing and data entry, odds are it’s due to these common AR challenges.

  • Time-consuming manual AR processes: Manually managing accounts receivable leaves little time to run or grow your business effectively — or even think strategically.
  • Lack of organization: An unorganized or siloed process for tracking invoices, payments, and customer information limits visibility into receivables, making it tough to reconcile and collect receivables on time.  
  • Payment Collection Issues: Without accounting software, many businesses struggle to track and collect payments for unpaid invoices — disrupting cash flow, business goals, and growth potential.

Addressing these challenges requires a little help (and the right tools), so you can get back to high-level strategic initiatives you’re meant to be doing.

Who Should Be Involved?

Anyone involved in billing, including customer account managers and sales reps, should be cognizant of collections. Hesitant to involve your front-line staff? Don’t be. These individuals typically instruct accounting when and how much to invoice for products or services. 

Most small businesses have limited resources, making AR coordination particularly important in small business accounting when billing errors and collection issues arise. 

Here’s an example:

Working in AR and collections for three years, I often encountered customers who refused to pay their invoices because of billing errors. Resolving customer issues meant calling them to field their concerns, and then soliciting help from sales and customer account departments to correct current and future billing issues. 

More often than not, invoice adjustments and corrective actions made all the difference in increasing cash flow and improving cash management. I also found that customers were relieved to have a resolution and gladly paid the outstanding amounts.

An Ideal Accounts Receivable Process

It’s important to have a clear and streamlined AR process for effective management. The process should include:

Creating a standard invoicing template

Design a professional-looking invoice template that includes all the necessary information, such as your business name, contact details, invoice number, payment due date, and a breakdown of the products or services provided.

I know, I know, most people have this already. But if you don’t, get on it ASAP.

Automating AR workflows

Prompt invoicing reduces delayed payments. Ensure you automate AR workflows, such as sending customer invoices as soon as the products are delivered and the services are completed — or as otherwise agreed.

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Setting clear payment terms

Clearly state your payment terms on the invoice, including the due date and acceptable payment methods, to set expectations and ensure customers understand their responsibilities.

Following up on overdue payments

I know it can feel awkward to send reminders about overdue payments when you’re the one completing the work for a client… but it’s necessary. 

The solution is simple, though: Set up automated workflows in your accounting system, to track past-due payments and send timely reminders to customers, without making you feel awko. 

5 Strategies for Making Accounts Receivable Management Easier

Now, onto the really good stuff. Here’s what you should do to make collections way less of a pain:

1. Develop Easy-to-Follow Invoicing

It seems obvious, but have you actually audited your invoices before?

Accurate and well-structured invoices are crucial for prompt payment, so try this out:

  • Provide a detailed description of the products or services: Ever heard the saying, the devil is in the details? Customers want more detail — not less. When they know precisely what they’re paying for, there’s less confusion and disputes.
  • Itemize every charge separately: Avoid putting a lump sum, catch-all amount, with an overly complicated description. If your invoice includes multiple products or services, break down charges by item so that it's faster and easier for customers to understand and pay on time. Plus, if there’s a big dispute over an item, you can ask them to pay the rest while you look into it.
  • Include payment instructions: Make it easy for customers to pay you. Provide detailed instructions on how and when to make payments. Include information about accepted payment methods, bank account details, and any additional information they may need to complete the payment.
Offer incentives for early payment

Offer incentives for early payment

This isn’t always necessary, but offering a small discount to customers who pay their invoices early just might motivate more prompt payments, helping improve your cash flow and working capital.

2. Implementing a Clear Payment Policy

Having a clear payment policy in place helps set expectations and ensures that your employees and customers understand your payment terms. Include the following elements when developing your payment and credit policies:

  • Payment due dates: Clearly state the payment due date on your invoices. Specify whether it is a specific number of days from the invoice date or a fixed calendar date.
  • Late payment penalties: I recommend including a late payment penalty in your payment policy. You don’t like paying penalties, and neither do other business owners — it cuts into their cash flow. Penalties can be a percentage of the invoice amount or a flat fee. Remember, the other alternative that I mentioned previously is to offer discounts or incentives to pay early… or both!
  • Payment reminders: Outline your process for sending payment reminders to customers. Determine when and how often you will send reminders for overdue payments, and be consistent. Be clear and friendly — avoid harsh messaging, and if you’re still feeling weird about it, tell them that it’s an automated thing upfront.

3. Use Automation Software for Efficient AR Management

Using AR automation software, tools, and apps can significantly streamline your accounts receivable management process. While 37% of large companies have adopted accounts receivable automation for at least 50% of their AR processes, only 17% of small businesses automate their receivables.

Implementing these automation tools improves your AR process efficiency by reducing manual effort — giving you more time to focus on higher-level strategic work.

  • Accounting software: Accounting software automation includes AR management features that streamline repetitive tasks such as invoice creation and routing, invoice and payment tracking, and real-time reporting, saving time and reducing human errors.
  • Online payment platforms: Integration with payment platforms or payment gateways provides your customers with convenient online payment options, reducing the time and effort required for payment processing. This means you can get paid faster.
  • Automated reminders: Accounting systems should have automated reminders that customers receive via email or SMS, ensuring that they’re updated about upcoming or overdue payments.

4. Monitor and Analyze Accounts Receivable Metrics

Regularly monitoring and analyzing key AR metrics gives you valuable insights into your customers and your business's financial stability. You should be tracking the following metrics:

  • Days Sales Outstanding (DSO): DSO measures the average number of days it takes to collect payment after a sale. By monitoring DSO, you can identify trends and take action to improve your collection process.
  • AR aging: AR aging groups your invoices into buckets — current, 30-day, 60-day, 90-day, and 120-day — to help you see which invoices were sent out and how long they remain outstanding. This helps you prioritize follow-up efforts and take appropriate actions to collect outstanding payments.
  • Customer payment history: It’s important to track individual customer payment histories to identify customers who consistently pay late or have a history of non-payment. With this information, you can make informed decisions about extending credit or implementing stricter payment terms. Or, y’know, firing them as a customer.
Author's Tip

Author's Tip

This should be part of your finance and company-wide risk management strategy.

5. Develop A Standard Late Payments and Collections Process

Despite your best efforts, some customers may still delay or default on their payments. If this is the case, it's important to have strategies in place to handle late payments and collections:

  • Friendly reminders: Start with friendly payment reminders a few days after the due date. Politely inquire about the status of the payment and offer assistance if there are any issues or concerns. 
  • Escalate communication: If the payment remains outstanding, your next step is to escalate your communication. Send firmer reminders, maybe to someone more senior, clearly stating the consequences of continued non-payment, such as late fees or collection actions. Invite them to call you to discuss issues, if any.
  • Net Accounts Payable (AP) with AR: If a customer has an AR and AP account with your company and isn’t paying their outstanding receivables, you may need to net the amounts owing them against their AR balance. I found this necessary in the past when I coordinated with the AP team to net payments against invoices outstanding for 120+ days.
  • Engage a collection agency: In cases where invoiced amounts are legitimate, you may need to consider engaging a collection agency. Collection agencies specialize in recovering outstanding debts and can significantly increase your chances of recovering the unpaid amount.
Assume the Best; Prepare for the Worst

Assume the Best; Prepare for the Worst

Most customers typically pay invoices unless there’s a problem.

 

In my experience, as much as 50% or more of doubtful accounts can be resolved and successfully collected by talking with customers about their concerns and finding an amicable resolution. They often just want to be heard, their issues addressed, and for you to find a fair solution.

Here’s an example of how well this strategy works:

Over a three-year period in AR for a large company, I used this approach to collect more than 70% of accounts scheduled to be written off.

The result: This approach was so successful that in addition to my annual salary, I was able to negotiate a % of successful bad debt recovery, generating an additional bonus of almost 20% of my total annual salary.

Classic Collections Mistakes To Avoid

As a business owner, when you’re managing accounts receivable, it's important to avoid these common collection mistakes that can interfere with your efforts.  

1. Inconsistent Follow-ups

Consistency and promptness are key when following up on late payments. Create a clear follow-up schedule and stick to it. Regular and persistent communication sets customer expectations about your processes and increases the chances of collecting overdue payments.

2. Failure to Document Communication

Keep detailed records of all communication with customers regarding issues and late payments, especially if you have many customer accounts. This documentation can be useful in resolving issues, for reference by someone new to the situation, if legal action becomes necessary, or if you need to provide evidence of your collection efforts.

When I worked with customers on billing issues, I detailed every conversation, including contact details, issues they had with invoices, the next steps to resolve the issue, who was involved in the resolution, and the outcome.

Remember, documenting everything for future reference and follow-up is in the best interest of both the customer and your company.

3. Lack of Empathy

“You’ll catch more bees with honey than vinegar.”

While being firm in your collection efforts may seem like the way to go, maintaining a professional and empathetic approach is better. Building strong customer relationships will likely lead to a better payment track record and increase customer retention rates in the long run. 

My experience

When I first started in AR, lack of empathy and customer focus was one of the most common complaints I heard when initially contacting customers for the first time to try to resolve and collect doubtful accounts. People often said they stopped paying their balances because no one was listening to them, or they were previously treated harshly when they had legitimate concerns or brought up billing errors.

My approach

I made it my mission to gain their trust by helping them resolve billing errors and developing a positive working relationship. I also encouraged them to contact me directly the moment they had concerns. This made it easier and faster to clear up long outstanding AR balances.

The result

Almost all doubtful accounts were recovered, and customers started paying their invoices on time with little effort.

4. Neglecting Staff Training

As a business owner, I fully understand how many hats you wear. When possible, it’s a good idea to train another person in your company on how to deal with AR issues and late-paying customers. 

Successfully running a business is about redundancy — make sure someone else is concerned with improving customer interactions and ensuring nothing falls through the cracks.

5. Lack of Attention to Billing Accuracy 

If there are mistakes on your invoices, customers will catch them. Often, they will refuse to pay based on this until the errors are corrected, which delays your receivables' collection dates. In my situation working in AR and collections, billing errors accounted for almost 90% of the doubtful accounts I worked with customers to resolve and recover. 

It turns out the customer was right, but no one had been listening. What made things worse was that these account balances could have been collected years prior, improving the company’s cash flow and financial health.

6. Incorrect Payment Allocation

Misallocated payments make it harder to determine which payments are outstanding. This leads to an increase in account reconciliations and payment reclassification, adding to confusion and frustration for you — and more so for your customers.

When payments come in, and it isn’t clear what they’re for, take a minute to pick up the phone and ask the customer. It takes significantly longer to reconcile accounts and reclassify payments down the road — and it’s less awkward than calling customers about invoices that they’ve actually paid but were misallocated.

With the right approach, the five strategies I outlined, and the use of accounting software, you, as a business owner, can efficiently and effectively manage your company’s receivables, improve your cash flow, and free up enough time to focus on strategy and growth.

All without hiring someone else to do it.

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Moira Alexander
By Moira Alexander

Moira Alexander is a recognized thought leader and the founder of PMWorld 360 Magazine and Lead-Her-Ship Group, a digital content marketing agency.

Leveraging her 17 years of experience in accounting, financial reporting, and financial systems implementation, Moira has written content for fintech businesses for over ten years and been named one of the top global female B2B content thought leaders and influencers.