Effective B2B accounts receivable management may be only as effective as your policies and procedures. Accounts receivable and collections policies contribute to and protect your cash flow by organizing procedures to follow when extending payment terms and credit to clients. The faster you can collect on invoices, the more reliably your business can plan for inventory and pay vendors.
Here are reasons to establish B2B accounts receivable and collection policies for your growing business.
As part of developing your accounts receivable department, strategic and manageable goals should be set. The best way to decide your A/R goals is to examine your cash flow needs and access to capital your business will need at any given time. Does your business require more cash up-front and a smaller amount of credit clients? Accounts receivable is money that will be obtained in the future, as opposed to cash-in-hand available now. Consider these factors:
- DSO (Days Sales Outstanding) - average time outstanding
- CEI (Collections Effectiveness Index) - a measure of performance
- Percentage of bad debt write offs that's acceptable to your business
- Review of all accounts and payment histories
Within the accounts receivable department, responsibilities may be broken down among the team. Part of the A/R staff may be responsible for obtaining accurate data from sales but not necessarily running credit checks. The person who does the invoicing may not be the same person attempting to collect on overdue invoices. In a growing business, these defined responsibilities will help ensure accounts receivables management is efficient and productive, without complication. Some roles and responsibilities to deliberate include:
- Credit manager
- Credit Analyst
- Collections specialist
Obviously invoicing is important to collecting on client accounts. Managing invoicing, however, goes beyond simply sending an invoice to a client. Accounts receivable policies should also dictate when an invoice is sent, where it is sent, to whom it is sent and how it is sent. Managing invoicing also means determining when invoices are reviewed so there is notice when an account is past due. Set up a policy to dictate the following:
- When to invoice - day of the week/month or when the sale is finalized?
- When to review invoices for late payments
- Who, what, when, where and how to invoice
- When and who to contact when an invoice is unpaid or wrong
When considering credit or future payments from clients, a credit policy is necessary for successful accounts receivable management. This policy will dictate procedures for determining credit and credit limits, including what histories will be evaluated. Other factors to think about:
- What credit standards are necessary?
- Will credit reports or references be required?
- At what limits will more documentation be needed?
- What credit and payback terms work for your cash flow needs?
Establish Collections Policy
Certainly not least is a policy to know when to pass an unpaid invoice to collections. A collections policy can also be used to decide if clients will be given discounts or incentives to pay early or in full. Making your clients aware of the collections policy could also incent them to pay quickly. Here are items to consider in a collections policy:
- How many days past due will prompt a demand letter or friendly reminder?
- How often will you attempt contact and when?
- When will you send the account to the collections agency? Will the amount due determine this or the days past due?
As a growing business, accounts receivables and collections policies establish helpful procedures that are meant to prepare your business for the future. Whether your A/R team is one person or an entire department, setting aside the time to establish these processes will keep your accounts receivables manageable and your cash-flow dependable.