When effectively managing your startup's finances and business strategy, accounts receivable (AR) is a critical piece of the puzzle. If your clients aren't paying you on time or if your capital is tied up in unpaid invoices, it's harder to grow your business.
It helps to know AR's role in raising funds and regulating cash flow to solve these pain points. You can use the following guide to manage your accounts better and position your company for sustainable growth.
What Is Accounts Receivable?
Accounts receivable is the money your business is waiting to receive from its customers. If you’ve delivered goods or services and haven’t yet received payment, this balance goes to your AR.
It is generally listed as a current asset on financial statements because it gives your company a future value. Once the client has paid it, you will debit the cash and credit the AR to reduce however much the client owes.
Accounts Receivable Vs Payable
AR is the amount owed to a company by its customers for goods or services sold but not yet paid for, while accounts payable (AP) is the amount that a company owes to its suppliers for goods or services purchased but not yet paid for. These are also known as vendor payments.
AR and AP are two sides of the same coin. If your business offers services to another company and sends an invoice requesting payment, you or your accountant will record that dollar amount in your AR. Your customer, on the other hand, adds this to their AP.
In other words, AR is money owed, and AP is money you owe. Both invoices fall under current liabilities on your company's balance sheet.
How To Manage Accounts Receivable
Managing accounts receivable requires a multi-faceted approach. There are general best practices that you can apply across the board, but it’s also important to learn how to keep tabs on AR, proactively address unpaid invoices, and leverage software solutions.
At a high level, you'll want to establish clear payment terms, regularly invoice customers, track payments, and automate your follow-up protocol for past-due accounts. Consider offering payment plans or incentives for early payments.
To set your company up for success, regularly review AR policies and procedures. By following these steps, your company can improve its ability to collect on AR promptly and minimize your risk of bad debt.
AR Best Practices
When it comes to AR management, you want accurate, up-to-date records. To ensure this, you'll need to appropriately record (and regularly update) invoices, payment receipts, and customer information.
Send invoices immediately after you provide services or deliver goods while it's still top-of-mind for your customer. Regularly follow up with your customers when there is a past due account to maintain a positive relationship.
Another great tip is to offer discounts for early payment or set up installment plans to encourage prompt payments. Assess the creditworthiness of new and existing customers to minimize the risk of bad debt.
You can implement an accounts receivable management system to automate invoicing, payment tracking, and collection processes. Provide regular employee training to ensure they understand the accounts receivable process and follow best practices. As your business goals shift and market conditions change, regularly review and adjust your policies and procedures, so they align.
How To Track AR
To track AR, you can use various methods. An accounts receivable ledger records all customer balances, payments, and invoices. You can use automated invoicing software to simplify the billing process, keep track of payment status, and provide real-time AR data.
If you prefer a more hands-on approach, you can use spreadsheets to track customer payments, payments received, and any outstanding balances. Some CRM software includes a module that tracks AR and can give your team a centralized view of customer interactions, payments, and balances.
You should also generate regular aging reports to monitor the status of AR, identify any potential issues, and take corrective action.
Handling Delinquent Accounts
Handling delinquent accounts requires a structured approach that balances customer relations with the need to collect payments. Regularly communicate with customers regarding their past-due balances, and encourage them to make payments or set up a payment plan. If you do not receive payments after multiple attempts, consider escalating to a collections agency or hiring a lawyer to assist with collections.
You should continuously review your credit and collection policies to ensure they effectively minimize the risk of bad debt. Keep detailed records of all communication, payment plans, and collections activities to ensure accurate tracking and reporting.
Always handle delinquent accounts professionally and consistently to maintain positive customer relationships and minimize the risk of bad debt.
Decreasing Receivable Turnover
Receivable turnover measures your company's ability to collect its AR promptly. To reduce the receivable turnover, you can offer incentives for early payment or extend payment terms to customers with a history of paying late.
To minimize the risk of bad debt, it's also important to monitor the credit risk of both new and existing customers and implement credit controls like requiring advance payment or limiting credit extended to them.
Streamlining the collections process is key, and you should prioritize promptly following up on past-due accounts. Using an AR management system to automate invoicing, payment tracking, and collection processes can also help.
Regularly reviewing and adjusting AR policies and procedures, and communicating with customers about their accounts and payment status, can ensure that your AR management aligns with business goals and market conditions.
Working With The Right Software And Accountant
To significantly improve your company's AR management processes, you'll want to team up with the right software and accountant. You'll save considerable time when you automate manual tasks like invoicing, payment tracking, and collections. Not only that, but you reduce the likelihood of introducing human error.
Accounting and finance software provides real-time AR data and analytics, like aging reports, to help you and your team make informed decisions. Some can even integrate with your existing solutions, like your CRM and ERP systems, to provide a centralized view of customer data and interactions.
An experienced accountant will offer you valuable guidance on AR management best practices, policies and procedures, and tax implications and can help ensure that AR processes comply with applicable laws and regulations. They also assist with credit risk assessments and collections activities to minimize the risk of bad debts.
Understanding Accounts Receivable's Impact
AR directly impacts your company in the following ways:
- It affects your cash flow. If your customers have late or delinquent accounts, you're missing money that is owed to you, and it can lead to a cash shortage.
- Higher balances signify greater risk to your investors. Your AR can impact your ability to raise funds, as investors and lenders view high levels of AR as a sign of weak credit quality and increased risk.
- It doesn't show up on your income statement, affecting reporting and insight. Uncollected AR can decrease revenue and net income.
- Unpaid balances hinder company growth. The inability to collect AR on time can slow business growth, as cash flow constraints can limit the ability to make investments or pay for necessary expenses.
Mastering AR For Startup Growth
Understanding accounts receivable is crucial for the health of your business, as it directly impacts so many important aspects of your financials. Late- or non-payment of AR can result in a cash shortage, decreased revenue, and heightened risk for your investors. Well-managed AR boosts your ability to make investments and pay for necessary expenses.
Fortunately, you have many tools and best practices at your disposal. When you prioritize AR management, you're setting your company up for sustainable growth, so start reviewing your systems today.