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Accounts receivable management is defined as the practice of collecting money that is owed after extending credit for a product or service. When you invoice a client for a product or service, it creates a balance in accounts receivable. When issuing credit to a client, what's owed on that credit is an accounts receivable balance. When your client pays a monthly retainer, there's a monthly accounts receivable balance. Collecting accounts receivable is important to keep your organization going.

Here are six tips to improve the process of accounts receivable collections.

Why Don't Clients Pay on Time?

The reason accounts receivable collections might need improvement is because some clients don't pay on time. If those balances aren't collected when expected, your business could suffer due to late payments of your own bills. The good news is that late payments can be prevented with a basic understanding of why clients pay late or not at all.

Consider some of the most common reasons for missed payments:

Your invoice was never received.
The contract or payment terms were unclear.
Client's credit card is expired.
Easy payment options may be unavailable to clients.

Of course, some clients may not pay because they have a dispute with your service or payment terms. Sometimes, even if payments are made on time, your business may still be unable to meet its own vendor obligations. When setting payment terms, make sure they match your working capital needs.

How to Improve Accounts Receivable Collections

After understanding why clients don't pay on time, it becomes clearer where there's a breakdown in the collections process. The most important part of fixing the breakdown is a simple follow-up. Here's where to start:

Know what's past due: Create an aging report. An aging report will inform you of accounts receivable collections efforts including which accounts are past due and for how long. The report also breaks down the lateness of the invoices (30+, 60+, 90+ days) so you know where to focus your time and resources.

Use best practices for invoicing: Invoices should always include clear information on who is being paid, what services were performed and when, rates, payment options, and a due date. The client should also have an expectation of when invoices will be sent to them so invoicing on a regular basis is important.

Set a collections policy: A collections policy instructs clients on your accounts receivable collections process. Your process will include what happens when a payment isn't received when due. If there are consequences such as payment reminders, project downtime, late payment fees or third-party collections, these should be stated in the collections policy. The collections policy can be included in your contract with the client.

Follow-up quickly: The longer an invoice is past due, the less likely it will be collected. If clients aren't paying on time because they never received the invoice, or they're unaware of when or how to pay, a simple follow-up can prompt payment. Don't be afraid of having a tough conversation with clients about what is owed to you.

Set up payment options: Do your clients get a discount for paying early? Are there payment plans available for larger invoices? Have you set up electronic payments or other ways to automate invoice payments? Inform your clients of these payment options so they'll know exactly how to pay and how to save money.

Proactive Accounts Receivable Collections

Consider accounts receivable cleanup as a proactive solution to accounts receivable collections efforts. With this service, accounts receivable balances are regularly monitored for late payment offenders and best practices are used to ensure timely payments. Using A/R cleanup can improve accounts receivable collections while creating a system of management so that payments are received when you expect them.