Weathering the Pandemic: 5 Ways to Collect Accounts Receivables Faster to Free Up Cash Flow

Crises are a natural part of the economic cycle, but they can leave businesses in a pinch—especially if they disrupt payments from clients. To help prevent your business from ending up in a cash crunch during tough times, here are five steps you can take to collect your accounts receivable faster.

1. Create and manage an accounts receivable aging report

An aging report organizes accounts receivable by the length of time an invoice has been outstanding. It tells you which payments are coming due and which are past due and for how long.

Use the aging report to determine when it’s time to send a reminder to clients about an upcoming invoice or one that’s past due. Send a reminder a week before an invoice is due and another on the day it’s due. If the payment becomes overdue, send a reminder after 7 days, 30 days, 60 days and 90 days. At 120 days, you may want to consider sending the bill to a collections agency.

Shortening the average collection period for accounts receivable can have a positive impact on your cash flow. An aging report can also help you identify patterns with your customers that in turn can help optimize your billing. You may notice that some customers are chronically late making payments, and there may be something you can do to speed up the process. For example, you could send a reminder email at the same time you send your invoice. Or if you send a customer paper bills, you could ask if electronic bills work better with their systems.

2. Offer early payment discounts

Another way to improve collection of accounts receivables is to offer incentives, such as a 1% or 2% discount, can nudge customers to pay their invoices early. If clients feel like they are getting a deal, they may prioritize paying you, knowing that it will benefit their own bottom line.

Conversely, you could adopt a system of late fees to penalize clients with overdue invoices. As invoice due dates approach, send reminders that a late fee will be assessed if clients let the deadline pass. Make sure late fees are part of contract terms with new clients right away. But you’ll need to wait until you update contracts with old clients if you want to implement a late fee policy.

3. Invoice immediately and shorten payment terms

Slow receivables may be a result of policies on your end. For example, perhaps you batch your invoices, sending them out at the end of each month to save time. This strategy may be creating a bottleneck. Instead, try sending invoices to customers on a rolling basis as soon as you deliver your goods or services.

You may also want to shorten the payment term that you offer customers—from due in 30 days to “due upon receipt,” for example. If you do change terms with existing customers, be sure to alert them ahead of time, though. If they’re used to paying on a certain schedule, they may unwittingly overlook a change of due date on an invoice.

4. Get paid up front

Upfront billing puts cash on your books immediately. If a client is uncomfortable paying the total amount up front, consider asking for partial payment with the balance due upon completion of your services.

If a project is very long, you may also consider milestone invoicing: Instead of billing all at once, you bill when certain tasks are completed. For example, you might send a bill when you order supplies, after portions of a project are finished or after a pre-established amount of time has elapsed.

5. Use technology to your advantage

Electronic billing helps eliminate issues that are out of your control, such as loss or delay in the mail. It also ensures that your customers have your bill in hand immediately after you send it. There are multiple tools available today to help small businesses automate their accounts payable and accounts receivable process. Do your research by speaking with your peers and scheduling demos from the different providers to find a solution that works best for you and your business.

You can also give customers the option of paying online. Online payment is easier for many customers, and it means that their payments arrive with you promptly and are deposited directly into your bank account.

Collecting your accounts receivable faster will help improve your cash flow. While these tactics may seem like small changes, they can have a big impact on your business. With receivables coming in swiftly and on time, your cash flow will be smoother and you’ll be better equipped to ride out the economy’s ups and downs.

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