How to better manage your accounts receivable

Nick Heintzman, Staff Accountant, Ashton Staffing, Inc.

Inefficiencies in your accounts receivable functions can dramatically impact your business.

“If a company is not managing its accounts receivables, it faces a greater risk of not collecting the money on a timely basis or, even worse, not being able to collect on the funds at all,” says Nick Heintzman, staff accountant at Ashton Staffing, Inc.

Managing your accounts receivable can be one of the most time-intensive duties your company faces, but it is also one of the most important functions

“It lays the groundwork for solid financial footing,” he says.

Smart Business spoke with Heintzman about how companies can better manage their AR to ensure fiscal stability.

How much control can a company really have over its AR?

A company has as much control over its accounts receivable as it can devote to it. The accounts receivable process is more than just managing the account once it is established. The process should start before the client ever begins doing business with you. A credit check should be run so you can evaluate the financial history of a prospective client to better protect you from losing money on the back end. If you notice a trend of late payments, you are better prepared to negotiate terms with the client that will help you still be profitable in the event that you are paid late. A credit report will show bankruptcies and liens, which could help you avoid getting tangled up with a client that would be more likely to fail and leave you with pennies on the dollar.

Another important part of evaluating a credit report is to set credit limits for prospective clients. This will help to protect you and also let the client know it will have to keep up with payments in order to maintain the relationship.

What are some of the more common problems companies face regarding AR?

Three problems that seem to be the most common are short-pays, payment beyond terms and companies failing to pay because of economic difficulties. All three can become significant difficulties in a very short time.

If a client is short-paying invoices, you are not capturing your full earning potential on the account. A client paying beyond terms will hinder your cash flow and potentially cause you to have to borrow to keep up with your financial responsibilities. And if you never receive payment from a client, you have not only lost the money associated with providing the goods or service, you also have lost the profit potential associated with the sale.

What technologies exist today that can help improve a company’s AR function?

There are several accounting software packages that make managing your accounts receivable much easier. QuickBooks, for example, creates reports that will break down your accounts receivable, in detail if needed, by preset time intervals. It can quickly show you which accounts are beyond terms, and this will help you focus on delinquent accounts on the days when you don’t have a lot of time to allocate to managing your accounts receivable.

QuickBooks also can apply finance charges to delinquent accounts, which helps to offset the cost associated with payment beyond terms. Many times, applying late fees will cause a client to re-evaluate its payment terms for you because paying late fees often is a burden. If a client knows you are serious about staying on top of its account, it is likely to get back in terms to avoid the extra charges.

Overall, what are the key factors to efficient AR management?

Some key factors are to keep up with it daily, be friendly but forceful, follow up in a timely and consistent manner, and do the research before taking on a client. However, being rude toward a client will not get payment any faster and will most likely cause the client to think twice about doing business with you. By being friendly and personable, you can help establish a relationship with the client, and that can go a long way in ensuring you are paid on time.

How can inefficiencies in the AR function, if ignored, affect a business?

The longer an account goes outstanding, the lower your success rate of collecting on the funds. In both scenarios — collecting the money late or not at all — it is going to restrict your cash flow for expenditures. Most accounts are set up on a net-30 term, whether it is accounts receivable or accounts payable. If you are collecting your money at the 45-day mark, it’s because you are not staying on top of your customers and you will most likely end up paying most of your vendors at 45-plus days, beyond terms. This can create conflict between you and your vendor, straining the relationship or even causing the vendor to require payment up front. Going one step further, if companies report to credit bureaus, your credit rating will drop if you are consistently late on payments. Poor credit ratings lead to higher interest rates for borrowing, which costs the company more money and restricts cash flow even further.

How should a business go about getting its AR functions back on track?

Set aside time every day to focus on it. If you devote some time every day to contacting aging accounts, you will:

  • Stay at the top of their minds, which will hopefully lead to faster payments;
  • Know which accounts you will need to keep a closer eye on by seeing ongoing trends; and
  • Be able to catch delinquent accounts right away before they spiral out of control.

Nick Heintzman is a staff accountant at Ashton Staffing, Inc. Reach him at (678) 359-3783 or [email protected]

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