I despise receivables. Asking people for money if the worst. I find it incredibly confronting, and just the thought of it puts me in a bad mood.
Receivables is all about the money your business receives for sales. Unpaid invoices either highlight a breakdown in your customer/supplier relationship or emphasises that this vendor is not an ideal client (otherwise they would pay their bills on time!) Either way it’s showing that something is wrong. However, I also know that in general, cash is pretty important, so I either have to get over myself or find a better way.
Without the timely payment of sales, your business’ cashflow will be ineffective, and simply put, it will not sustain this. It’s as simple as – the less money you have in the bank, the less you can utilise to build your business – and statistics show that the longer an account remains unpaid, the greater the risk of it not being paid in full (I read this once and have no idea if it’s actually true, but it sure sounds good).
But how do you know if you have a problem? Well, the answer lies within a simple ratio –
If this the answer is over 40%, you’ve got issues. In fact, if you backtrack this calculation using historical monthly figures you can discover exactly when your problem began, and I bet it will correlate with an event that took place, whether that be financial (the G.F.C hit), or personal (marriage dissolved).
No matter what the reason, managing receivables is not just tough, but costly. When I was a full-time bookkeeper managing the receivables was a large portion of my role, I’d say 30% of my time. Now just think about that – 30% of my wages paid by the company was spent on chasing up money – and I found that most of the time, people weren’t paying because the sale had not been managed properly by the sales staff (to this date I believe receivables should be handled by sales).
So imagine this, what if that whole part of the sale was no longer necessary? What if that 30% could be utilised to grow the business, rather than simply sustain it? Is this possible? Yes.
Now it would all be great if we could work like supermarkets i.e. receive payment on the spot from customers, but pay suppliers 30 days after the sale occurs (oh the cashflow!) but we can’t, so I’ve listed some tips I picked up along the way to help get rid of that time spent on chasing payments.
7 Tips to Stay on Top of Your Receivables:
- State payment terms in contracts – This is key to ensuring timely payments. If anyone is unsure of their obligations, you have a signed piece of paper to back you up.
- Establish routine payment terms – Generally speaking, in New Zealand accounts receivables are easily managed because most business payments are due on the 20th of the month following invoice date. This is great because you know on the 24th that you can focus on following these up. I don’t know why other countries haven’t caught onto this. If this is not possible in your business, it is a good idea to put time aside once a week to focus solely on overdue receivables and document all correspondence.
- Process invoices electronically – There is no chance of your invoices being “lost in the mail” if you have an electronic record of it being sent. It also cuts down on losing days to snail mail where your invoice could be getting approved on the other side.
- Allow online payments – Receiving cheques or cash adds a huge amount of paperwork for administrators, as well as risk (i.e. losing a cheque or keeping money on site). Just having to walk to the bank to deposit the funds physically is incredibly time consuming. Trust me, try to process as much as you can via online banking, and even offer as many online payment options as possible i.e. Paypal, Stripe etc.
- Incentives – Giving vendors another reason to pay in a timely manner can help move things along. Some (like myself) offer prepaid bundles at a discounted rate. This is possible because of the time saved in following up payments means the discount pays for itself (along with the increase in my cashflow with the items being prepaid). Many companies charge a percentage extra each month an invoice goes unpaid, but I have to admit that in my experience, it is very ineffective and generally creates more work for bookkeepers
- Send statements – Once again this is easily done in New Zealand because invoices for the month prior are due on the same date, so sending statements can help administrators ensure they have input all invoices due into their system. Even without this payment term, statements are a handy way to keep your company in the forefront of your customer’s mind.
- Review ageing reports – This will not only tell you how long an invoice has gone unpaid but highlight repeat offenders so you can manage them accordingly in the future. It may be best to establish a system where bad debtors prepay a percentage of future work, but the aged report is where you can start the discussion.
Some of these may seem self-explanatory, but it never hurts to read something like this and have it confirm that you are on the right track already. The worst case scenario you can sell your debt to a debt collection agency, and if it’s been at least four months, I would recommend that. The more time you spend on receiving this money the less profit you make from the deal itself, because time is money, so know when to cut your losses.
For me, I’d rather discount my rate slightly to receive funds prior to the job. My client is taking a risk on prepaying, but they will receive the reward in the work I perform, as well as this discount, so it is win/win. However, I would be very interested to hear from you about your techniques in keeping your receivables from ageing, so feel free to email me, or comment below. The more ways I can avoid asking people for money the better!
*Post publish edit – I should note that many of the above are reliant on utilising an accounting package, which is an absolute must in my eyes, they are worth their weight in gold. Before you say it’s too expensive, WaveApps is free and a good place to start, or Xero (which we use) has a 30-day free trial.