Mohammad Khan Yusufzai is Masters in Management, specializing in Economics, Finance and Marketing, with corporate & lectureship exp.
As an entrepreneur or a business owner, you hear the term 'accounts receivables' a lot. They sure are crucial for your business. But what are they?
Surely, You offer a credit payment option to a customer instead of receiving the immediate cash payment. This amount is your Accounts Receivable or future cash receipts.
In other words, Accounts receivable tells you how much of your cash flow is still in the unpaid client invoices. It is the amount that is receivable. You expect to receive that amount in near future.
Why are Accounts Receivables so Important?
Selling goods and services on credit is evident right from the emergence of business. It is an important, rather unavoidable aspect of running a business. While accounts receivable signifies money your customers owe you, accounts payable indicates money you owe to your vendors.
Necessary to Build Long-term Relationships With Customers
Customers are very demanding in today's era. You have to provide them with different payment methods and options to choose from. If you don't offer them to pay through credit, chances are, that you will lose customers to the competition.
Accounts Receivable is the Lifeblood of a Business's Cash Flow.
Account receivables help you with cash flow management. It tells you which customer owes you money. And by what amount. This helps you to decide if your current cash account is accurately representing the true financial position of your business. You can accurately determine if you will have enough money or will you be in cash shortage soon.
They Help in Determining Profitability
Based just on receiving money, you may overstate or understate profits. Accounting Standards require it to match the profits with the same year they were earned. Your business's accounts receivable is essential for calculating your profitability. AR also gives the clearest indication of your business's turnover. It is an asset, as it represents money coming into your business.
Some Tips to Help You Master Account Receivables.
The best Practice is to oversee Accounts Receivable on a consistent and routine basis. You may be a retailer dealing in small sums. Or involved in B2B transactions with large funds.
Regardless of your business type, ensuring payment is necessary.
Here are some tips to make sure your business stays on top of its AR:
Use Automation Software
The best thing that you can do is to introduce automation for your account receivables. A lot of small and medium businesses are adopting payment solutions such as OnlineCheckWriter. They are capable of handling everything from accounts receivables to check-printing, ACH payments, invoicing, and much more. You should definitely consider getting such software to streamline your efforts.
Make ACH or Credit Cards a Priority.
Prioritize that your customer pays you via credit cards. It is much viable than giving credit. If somebody is not comfortable with sharing credit card info, you can opt for ACH payment. Automated Clearing House (ACH) payments permit your clients to set a date for payment and enable automatic deductions from a checking or savings account each month. Thus your work of tracking and calling each unpaid invoice is mostly sorted.
Maintain a Full-Proof Internal Process
Create a proper and well-defined process for managing account receivables. Decide one day of every week to monitor upcoming payments. Have a routine to inform your clients beforehand for a payment.
Have a consistent duration after which you will either stop your services or take a legal route to get your money. You can delegate this work to your employees. Stick to this process for smooth transitioning of accounts receivables.
Confirm Receipt of Invoices.
It is always a good habit to confirm with your customer that they have received invoices. It is a good way to verify that your customer has received and understood how much he's charged for and what are the payment conditions. This helps to avoid a lot of misunderstandings when the time of payment comes. Through invoice, you have proof that you clearly communicated all the important terms to your customer. And the customer has acknowledged it.
Extend Credit but With Moderate Terms
You should have a proper credit policy. And by all means, you should always stick to that. However, if a case arises where you know the customer can pay in the future, or he missed the payment out of some genuine reason, then you may extend the credit period. But only do so when you are 100% sure that you will get what you are owed. And it is also added advantage to have some sort of guarantee from your client.
Documentation is Non-negotiable
Documenting your account receivables is very helpful. Not only do they help in your book-keeping but they also serve as useful instruments during tax calculation.
You should document all the crucial information. For instance: keep documents in order from the first contact with a client, conversations, and agreed-upon terms. In a worst-case scenario, this documentation will be a life-saver, in case you need to pursue payment through a collection agency or court.
Stop Your Services.
Ultimately, if your client is not respecting your credit policy and keeps missing guidelines, you should stop your services. You should also notify them that you are taking a legal route to get your money back from them. it may seem a bit extreme. But this is what you are left with if you have exhausted all the other possibilities to get your money back.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Mohammad Khan Yusufzai