Accounts receivable is essentially the term for the money that customers owe to a business that delivers goods or services on credit. It also refers to the range of processes employed to collect that money. The accounts receivable model does carry some level of risk, because you are delivering a product or service before receiving payment for it. However, for many businesses it is simply not realistic to expect customers to make cash payments 100% of the time, and you may also lose out on sales if your competitors are offering credit terms and you are not.
Now, given the importance of getting paid to a business’s ability to – well, stay in business – you would expect accounts receivable to be a massive priority for owners and directors. And yet, in every quarter of 2022, the Federation for Small Businesses (FSE) found that the majority of SMEs experienced late payments. According to Intuit Quickbooks, the average SME is now due an average of £27,214 in overdue invoices.
So the question is, what is going wrong?
Where accounts receivable falls down
We know that as a business owner you know your products, your services and the competition inside out. That’s never been in dispute. The trouble is, most business owners are not financial experts. Their business was born because they were passionate about something (that likely has nothing to do with finance) and recognised a gap in the market. We are in awe of the creativity, drive and passion of so many of the entrepreneurs we work with. But when it comes to the financials, especially as a business grows and requires more sophisticated financial management, the knowledge, resource and skill just isn’t there.
Accounts receivable most often falls down as businesses move out of the startup stage and into what we call ‘adolescence’. You’re dealing with more money than you’ve ever had to before, but you’re still using an Excel spreadsheet or small business accounting software like Xero or Quickbooks. You might not have a dedicated accounts receivable team, instead relying on a part-time bookkeeper or office manager who simply doesn’t have the knowledge or time to deal with the level of transactions now flooding through your business. Everything is set up on different systems that don’t ‘talk’ to each other, making it easier for things to slip through the gaps.
Not to worry – we’re here with eight great ways to improve your credit control processes and transform your accounts receivable department into a well-oiled machine.
- Establish good credit practices
Before extending credit to a new customer, it’s firstly a very good idea to make sure they have the ability to pay you for services rendered. When you’re growing your business, it’s tempting to think that any sale is a good sale – but at the end of the day, it’s only a sale once you have the money in your pocket. Otherwise, it’s called doing work for free!
Credit checking companies such as Experian and ClearScore, enable businesses to request credit reports on potential customers, allowing them to gain a clearer idea of their ability to fulfil financial obligations.
- Make your payment terms crystal clear
Have you ever chased a customer for payment only for them to say they ‘didn’t know’ when, who or how to pay? This is a sign that your credit terms aren’t clear enough, or you haven’t made them accessible to your customers.
When you send an invoice, it’s important to ensure that the wording is clear and easy to understand, with your credit terms and payment dates explicitly stated. If you have a range of payment options available, you should explain what these are and provide any details required for your customers to complete their payment promptly and with as minimal effort as possible.
- Step up your software
When it comes to running your accounts receivable like clockwork, automation is your best friend. Excel can take you so far, but it is a manual tool that is vulnerable to human error. Even an entry-level accounting solution like Xero or QuickBooks is only going to offer limited support for a growing business with ever more complex financial requirements.
Accountancy software that enables the automation of invoicing and payment collection procedures, and makes it quick and easy for clients to make payments online, can be a real gamechanger. The software we use for all our clients is called iplicit, and it’s a sophisticated accounting solution for mid-size businesses that offers a huge number of options for automating and systematising your accounts receivable processes. It makes it easy to keep track of debts and can fully automate your collection process, from polite initial reminders all the way up to notifications of potential legal action.
Quite apart from avoiding costly errors and omissions, automating these processes could save your team a ton of time and free them up for higher-skilled work that adds more value to your business.
- Update your database
So, you’re emailing out your invoices promptly and ensuring you’re sending timely reminders to late payers. It will all come to nothing if you’re sending your communications to the wrong email address! Incorrect customer details will lead to invoices going astray and payments failing to arrive when they are due. Incorrect payment terms and credit limits assigned to customers in your database can also prove problematic.
In addition to causing you financial problems, an outdated database simply does not look good. If your customers keep getting chased up for invoices they have never received, they may rightly be frustrated and this in turn can cause embarrassment and discomfort for your staff. And it’s not great for data protection either if you have confidential financial emails flying off to the wrong email addresses!
- Provide a good customer experience
At Insight Associates, we believe that good customer service should extend through every interaction a business has with a client, from marketing and sales right through to the completion of their transaction. However, the amount of times we have seen invoices sent to clients with no personalisation, text in ALL CAPS (WHY ARE YOU SHOUTING AT ME?!) and generally very little effort to ensure that the client completes their transaction with a favourable impression of the business – well, let’s just say we’ve run out of fingers and toes to count on.
As they say, a bit of politeness costs nothing and it can go a long way when you’re looking to secure payment from a customer. At the end of the day, the person on the other end of the email or phone call is a human being too, and there could be many reasons in this difficult economy why an invoice may not have been paid on the dot. A polite email or follow-up call can still help you develop a positive working relationship with your customer whilst ensuring you get the money you’re due.
- Have a collection process in place
When a debt is still outstanding despite your very best efforts, then having an established collection process in place can prevent the late payment from becoming a bad debt. Bad debt is essentially an owed payment that a business no longer feels it will be able to collect. Between Spring 2022 and Spring 2023, the average bad debt for UK SMEs jumped by 61% from £10,329 to £16,641. That is a lot of hours of free work!
Once you have exhausted all in-house methods to collect a late payment, for example emails, calls, letters and even adjusted payment terms, you should have a last resort process in place. You may wish to use a specialist collection agency to take some pressure and stress off your team or, if all other attempts have failed, you may decide to initiate legal action against the customer. However, you will probably want to weigh up the potential costs of a lawsuit against the value of the invoice in order to evaluate whether pursuing your customer through the courts is worth the effort.
- Take action against consistent late payers
If you’re spending a lot of time and effort chasing payments from the same few customers, it might be time to make a decision about the viability of your working relationship. Consistent late payment is an indication that your customer may be experiencing ongoing cash flow issues that will continue to impact your own business for as long as you continue to work with them. It also signals that they lack respect for your business and the quality of your services, which isn’t really something you want to encourage.
Difficult thought it might be to contemplate, firing a customer who you are constantly chasing for payment could be the best thing for your business. Less drastic but still effective options might include reducing your credit limits for that particular customer or even setting up a payment plan to help the customer make their payments in a way that suits them and they can afford.
- Dedicate the resources
Getting paid for what you do is absolutely vital to business success. So, it makes no sense to continue relying on an overworked bookkeeper or office manager who simply cannot cope with your business’s growing and ever more complicated financial management requirements. In addition to investing in your software, you should also be considering investing in human resources, to ensure that your team has the time, training and knowledge they need to properly run your accounts receivable department.
If employing a team of full-time staff is beyond your means or you simply wouldn’t know where to start, then you might want to consider outsourcing your accounting and financial management processes to a team of professionals. You’ll have a ready-made team of professionals with years knowledge and expertise, with all the skills required to deal with every situation and eventuality. You’ll also avoid all the additional costs that come with hiring employees: sick and holiday pay, pension and National Insurance contributions, maternity and paternity leave… we could go on.
At Insight Associates, we have a complete team of financial management specialists, accountants and administrative staff to help businesses professionalise their financial management. We don’t pretend to be a cheap and cheerful option for businesses looking for a quick fix for their issues, but we can be highly cost-effective for businesses who need a proper, grown-up financial management upgrade that’s going to support their growth for years to come. If you’re an ambitious business looking to invest in the future and set yourself up for success, then Insight Associates could be the answer for you. Get in touch with us to find out how we can help you turbocharge not only your accounts receivable, but your entire financial management setup.
