Do you have a documented accounts receivable process in your business?
Or more important than documenting it, do you use an accounts receivable process? Documenting it can come later.
One of the most common issues Admin Army’s bookkeeping clients are facing when I begin working with them is around aged debtors. They have invoiced clients, who have not paid beyond the due date. This can have a significant impact on cash flow, which is the lifeblood of all small business.
By working with our clients and implementing an accounts receivable process similar to the one I’m about to share with you, our clients have experienced a significant reduction in their aged receivable percentages – some even dropping from 61% aged to 6% aged (with the balance being current, not yet due invoices).
Where to start with your accounts receivable process
First things first, before you even begin any work for a client you need to have clear terms of service in place. As a minimum, these terms should cover:
- What your client can expect from you
- Expectations around invoicing and payment
- How any issues that pop up will be sorted between you.
I recommend having a chat with your lawyer or a debt collection agency to get assistance in writing these.
Your clients can’t pay you if you haven’t invoiced them, so you need to invoice them as promptly as possible. You don’t have to wait until the end of the month to invoice your clients. I recommend setting aside a specific day of the week and taking the time to invoice anyone who has projects that have been completed. Even better, work this into your project process. As soon as a project is complete, raise the invoice. It only takes a few minutes (if you have other good processes in place), but it can save a lot of time waiting for or chasing payment later on.
Offer multiple payment methods
You can also help make it easier for your clients to pay you by offering various payment methods:
It may seem obvious, but make sure you have your bank account details on your invoice. These are a vital component to getting paid.
Direct debit services like Ezidebit or Debit Success can take a lot of the pain out of chasing clients for payment, as your clients have given you the authority to deduct the money (via these services) from their account – putting the control in your hands. These are great options for regular recurring payments, where the amount does not frequently vary. You can just set them up and forget about them. The service will send you regular payment notifications and deposit the money (less any fees) into your bank account. You only need to be concerned about exception reports.
There are plenty of payment service providers offering credit card payment facilities to NZ businesses. DPS have a significant market share, along with the services that most banks provide directly. With no setup costs and no fixed monthly fees, PayPal has long been a preferred payment option for many small businesses. Stripe has begun competing well in the last few years with slightly lower fees.
One of the benefits of offering PayPal or Stripe if you use Xero as your accounting software is that you can connect these payment methods to your account. Once connected, you can offer online payments directly from your Xero invoices. Xero users who implemented this feature have seen a reduction in invoice payment times – they’re now getting paid ten days faster.
Other payment options
Laybuy, Afterpay, Oxypay and Genoapay have all become household names in small business circles in the last 12 months. They offer your clients the ability to split their payments over a period of weeks (for example, a $100 payment becomes four weekly payments of $25). You get paid up front, and they take a fee to provide the service. I have heard nothing but positive feedback about these services from small business owners. Many businesses have experienced significant increases in overall sales by removing price as a barrier to their clients. And not only that, they’re not chasing clients for payment either.
Traditional payment options
Cash or cheque are both still always an option. If I had to choose between having to make a trip to the bank because I’ve been paid cash or not being paid at all, it’s a pretty easy choice.
Follow up on unpaid invoices
It seems straightforward, doesn’t it? But you would be surprised by the number of small business owners that are not following up on unpaid invoices.
Send invoice reminders
One of my favourite features in Xero is invoice reminders. They are a great way to automate part of your accounts receivable process.
All you need to do decide how frequently you want Xero to remind your clients about their overdue invoice and customise the email to be sent out to them. I recommend a reminder starting 7-days after invoice and then every 7-days after that. You would be surprised at the number of clients who have just forgotten to pay their invoice. It’s easy enough to do with the 7,000 other things you have going on in your business. They usually sheepishly apologise and pay immediately after receiving the first reminder.
It’s important to note that if you do turn on invoice reminders, you need to make sure you are regularly reconciling payments in your Xero account. If you don’t your clients may receive invoice reminders when they have already paid as the invoice hasn’t been marked as paid in Xero, which is never a great look.
Get in touch
Sometimes the most effective way of finding out when your invoice is going to be paid is to pick up the phone. This approach gives you the opportunity to check in with your client and make sure that they’re not withholding payment for a particular reason. It will also keep your invoice front of mind. After all, the squeaky wheel gets the oil.
The person who is selling in the business, should not be the same person that is performing debt collection. This puts too much strain on the sales relationship. If possible, I highly recommend getting someone else to take care of this task for you.
To give your client the chance to pay the invoice once the first reminder has been emailed out, I would suggest making the first phone call at the 10-day overdue mark. Keep regularly checking in with your client until the invoice is paid.
Still no payment?
You’ve followed each step in your accounts receivable process and still not received payment, now what? It might be time to consider referring the invoice to a collection agency. This is where having well-defined terms of service come in to play, as these provide the basis for the collection agency to act. If these are written correctly, it will not cost you anything as the costs of collection can be passed on to your client.
It’s never a pleasant process to have to go through. However, at the end of the day, you have provided a product or service that you deserve to be paid for. It’s not necessary for your business to suffer because your client is not paying you.
The next steps
Now you have your accounts receivable process humming, it’s time to look at your accounts payable process. Check out our accounts payable blog to learn how to simplify this part of your small business bookkeeping.
If you’re struggling to find time to work through an accounts receivable process in your business and your overdue invoices are getting out of hand, we can help you with one of our weekly or monthly bookkeeping service packages. Get in touch today to find out how we can help!
Happy taking care of your own bookkeeping for now? Check out our small business bookkeeping checklist.