As accounts receivable (A/R) become delinquent, your business expenses could fall behind. With every late-paying client, cash flow for payroll, rent, or other vendors falls short, threatening your company's bottom line and growth. The effectiveness of your A/R department may be one of the most important measurements to determine the success of your business.
Mastering accounts receivable and invoice management is vital for B2B companies to ensure smooth cash flow and sustainable growth.
Optimizing Accounts Receivable Processes
The best way to ensure successful cash flow is to prioritize A/R. Here are some best practices to consider:
- Create efficient processes for invoicing, setting credit policies, payment terms, and more.
- Communicate often with the client's accounts payable person or A/P department.
- State payment terms clearly in contracts or on invoices. These terms may include discounts for early or in-full payments and late fees for delinquent payments.
- Automate accounts receivable through A/R software and allow client payments to be received electronically or automatically deducted directly at regular intervals.
- Run aging reports regularly to determine when payments are running late.
- Establish a collections policy to decide what happens if a payment is past due.
Creating and Enforcing a Strong Collections Policy
All B2B contracts or agreements should include payment terms and statements regarding late payments. A collections policy can consist of:
- Who to contact for past-due accounts.
- How often contact is attempted.
- How many times contact is attempted before the account is sent to collections.
- When an account will be sent to collections.
- What client actions will determine immediate escalation, such as refusal to pay, non-communication, or unkept promises to pay.
Best Practices for First-Party and Third-Party Collections
It’s common for companies to handle collections in-house (first-party collections) before escalating accounts to a collections agency or law firm (third-party collections). First-party collections best practices include:
- Demand Letter: A demand letter informs the client that the account is past due and presents an opportunity to pay in full or establish payment arrangements.
- Contact: Businesses may attempt contact many times according to their collections policy when a demand letter doesn't facilitate a response.
- Escalation: Escalating the account to a third-party collections agency is the next step before a lawsuit.
Business-to-business (B2B) relationships must be handled with care. Defining your accounts receivable and collections policies will help establish boundaries to get your invoices paid faster. Too much is at stake when a payment is past due. A trustworthy B2B collections agency understands the value of business relationships and may be more successful at recovering debts.
Leveraging Technology for A/R Clean-Up and Improved Cash Flow
Instead of encountering problems with collecting from clients, use these tips to clean up your receivables and increase your cash flow:
- Use Automation: Invest in technology to help automate the accounts receivable process. At the very least, consider using calendar reminders to invoice regularly, run aging reports, and follow up on old invoices.
- Streamline Your Process: Organizing and streamlining A/R helps you proactively discover clients who aren't paying on time. You'll have a clear picture of any changes that can be made to prevent late payments.
- Keep Customer Data Current: A spreadsheet or CRM system helps maintain an updated database of customer information and accounts payable contacts. You'll know who to call if you need to follow up.
- Audit and Adjust: If your payment terms or credit policies are too lax, only you can make the necessary changes. Run audits to determine who is avoiding paying and why.
- Work with a Collections Company that Honors Your Reputation and Clients: A client who pays late may still be a good quality client with various other reasons for not paying on time. If your accounts receivable department doesn't have the resources to follow up or figure out why, it's imperative to work with a collections agency that still treats your clients well.
Efficient A/R management ensures that your business maintains liquidity, supports operational expenses, and avoids financial strain. In B2B relationships, timely payments are crucial for sustaining long-term partnerships and fostering trust between businesses.
