Maintaining an effective Trade Accounts Receivable management system is an important responsibility of an accountant that can help your business grow even if you expose yourself to the risks of issuing (transferring) goods and services at your own account.
How to Create an Effective Accounts Receivable Management
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1) Develop your credit policy
A credit policy is a form of control that protects your business from customers who don't pay on time. Before granting credit to clients, they must go through a rigorous and formal verification process. You must establish requirements, terms and conditions that would allow you to identify "good and reliable debtors".
For example, you can set maximum credit limits to limit the amount of purchases they can make in credit. Along the way, you can increase credit limits depending on the payment scheme of the client. -
2) Submit invoices for payment within 48 hours
If possible, you must send an invoice for payment within 48 hours after the end of work or delivery of goods. Customers are more likely to pay quickly because the service or product is still fresh in their minds. -
3) Personalize invoices for payment
Personalized invoices add aesthetic value to the invoice. Adding a logo and, if possible, your brand colors and designs will help your invoices stand out and promote your company. If customers can easily identify your invoices, they can also easily remember them and pay as soon as possible. -
4) Act quickly when customers miss a payment deadline
Create an Accounts Receivable Aging Report at least once a week to keep track of invoices that are nearing maturity or have expired.
If the invoice is overdue by at least one day, contact the client immediately to discuss this with him.
Often missed payments can be resolved quickly with a timely phone call or email reminder. If a client does not return your calls, you can send a reminder letter by mail or email within 48 hours, depending on what your client prefers.
Use the option - automatic dispatch sends payment reminders to the client if his invoice is due in a certain number of days. -
5) Use the "Sales Order" document for efficient order management
The "Sales Order" document helps your staff verify that products awaiting shipment match the details and specifications of the customer's order. Reviewing a purchase requisition during order fulfillment helps prevent errors when preparing a product or service for shipment. -
6) Use software to issue e-invoice
Using invoicing software not only makes it quick and easy to create, send, and track invoices, it also reduces your workload. You can check out our list of the best small business invoicing software - some of them are free so you can start with them to get an idea of how the platforms work. -
7) Integrate accounts receivable management with accounting software
Make sure the software you use to track and record accounts receivable payments is integrated with the software that records deposits and reconciles your bank account. This ensures that receivable payments received are consistent with bank account receipts. -
8) Separate Receivables Management Responsibilities
In large companies, one person may issue invoices, while another may receive information about receipts of money and apply them to unpaid invoices.
In small companies with a responsible employee, first, they must review all incoming receipts, compare them with unpaid invoices, and then transfer them to the accountant for entering into the accounting program. -
9) Solve customer issues to avoid returns or charges
One of the reasons why customers do not pay on time is because they are not satisfied with the product or service provided.
Create a system to solve their problems by putting them in contact with the right person, preferably not your accounts receivable clerk as they are not usually involved in this part of the business.
Customer concerns must be resolved prior to any return request or before any claims are made. -
10) Track the effectiveness of accounts receivable management
Use "Accounts Receivable Turnover Ratio" that shows how many times in a period (usually a year) an organization has received payment from customers in the amount of the average balance of outstanding debt (to assess how efficiently your business is quickly collecting receivables ). The higher the turnover of receivables, the better.
Assume that the receivables turnover in 2021 is 3.5. This means that we collected receivables 3.5 times during the year. However, in 2022, the receivables turnover is 2.5. Therefore, we can say that our receivables collection time was shorter in 2021 compared to 2022.
You should track how this ratio changes over time as new policies and procedures are implemented. -
11) Assess or write off bad debts
Bad debts are debts that you think will never be collected. When bad debts arise, you must write them off your books so that they are excluded from your income and assets.
Large companies often evaluate their bad debt regularly and as new bills are issued. Small businesses usually just wait until the debt becomes bad and then record bad debt expenses.
Interested in learning more about automating your account receivables practice? Read the Guide "Accounts Receivable Automation" to learn how and why to automate each component.
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