It’s no secret that if you don’t secure terms with people who owe you money, you’re losing big time. So what can you do to tighten control?
Getting your accounts receivable in line can dictate the pace of your company’s growth. Revenue and cash flow drive everything.
Over 70% of companies have less than enough cash to cover over two months of expenses. While you might have to tread water a little as a startup, this is far from where you want to be, even as a growing operation.
With the right AR infrastructure, this doesn’t have to be your reality. So we’ve outlined a few simple steps to get things in check.
If you get this down pat, you’ll get paid on time, reap the benefits of happy client relationships, and have more in your pocket to make bold moves.
Let’s review the three best practices to manage your accounts receivable.
1. Switch to Electronic Payments
It’s long since been the end of the paper trail. Say goodbye to snail mail and paper statements. This loses you time, and a little money on printing and mail, taking over double the effort to track. Switch to electronic invoicing to ensure fast, timely, and effortless payments, delivering your profit right when needed.
Integrating the right invoicing software makes this a hands-free process once you get the ball rolling. This allows you to customize for individual clients and keeps you on top of your accounts receivable without lifting a finger.
2. Dictate Clear Billing Protocol
Like dealing with your employees, the more direct and clear you make yourself, the easier it is for your accounts to follow directions. If you employ any best practices to manage your accounts receivable, start here by including these in your process:
- Invoicing dates and billing periods
- All relevant information your account is required to include
- Information about your record-keeping process
- AR process assessment as needed
- How you handle collections for overdue bills
Get your system in order first. You need billing information properly filed (easy enough with an electronic system in your pocket), unique information at the ready for each client, and details and notes so your staff can follow a process for atypical bills.
Part of why you’re getting paid late might have to do with how you handle business. If you don’t have things nailed down, how can you expect your clients to pay you promptly?
3. Use the Right Metrics
Regardless of what actions you take to secure your money, you’ll need the right KPIs and metrics to take advantage of the best practices to manage your accounts receivable. Keep an eye out for the following:
- Days Sales Outstanding (DSO): This rules the process, as it is your reference to how long it takes to receive a payment on average. Aim for below 30 days – any longer and reassess with your client or vendor.
- Turnover Ratio: This metric outlines the speed it takes you to turn a client or service into revenue. You want this to remain low. The higher the difference, the more open accounts you’ve neglected to collect from yet.
- Collection Effectiveness Index (CEI): Your CEI outlines the percentage of accounts you profit from. Obviously, shoot for the stars and a 100% ratio. If it’s not perfect, reassess and start making calls where necessary.
Managing Accounts Receivable Starts Here…
But it doesn’t end here.
These are some of the biggest players, but more specific metrics might work best if your billing is out of control. Contact Foresight today to speak to a Growth CFO and let us know what you’re dealing with. We can dive deeper into credit and collections policies if you already have a mess on your hands. Even if you have things down-pat, you might want to think about proactively collecting. Let’s start the conversation.
Reach out today for a no-hassle consultation and learn more about how we can drive your growth.
Feel free to use this link to Schedule a 25 Minute Discovery Call.
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