Accounts Receivable 101
Get Paid On Time AND Maintain Good Customer Relations
By Susan Brown
Managing outstanding debts is key to keeping business running, both for cash flow as well as for maintaining good rapport with your customers.
Take Bill, for instance. His software company will invoice clients for a portion of the installation fee and collect a monthly recurring charge.
Bill often has outstanding bills – his accounts receivable. Simply put, accounts receivable, or AR, is the money a business is owed. When Bill has three unpaid bills of $1,000 each, his accounts receivable is $3,000.
This is an asset on Bill’s balance sheet, which he can leverage to finance operations. But it’s not just abstract figures on a page, of course. This is money owed to him that he needs to collect.
If he’s been paying attention, Bill knows how long a bill has been outstanding. And he has a plan to collect on them. These outstanding bills are essentially credit, the last thing a small business wants to do is treat its AR like a credit-issuing function. The goal, as a small business, is to collect the cash you’re owed as quickly as possible.
How can Bill get paid on time and retain good customer relations? There are three elements to a successful collection.
- Set the expectation. Every communication regarding a bill or payment should include a clear deadline for the client.
- Monitor outstanding bills. Managing an effective AR system is all about knowing where things are and when things are coming due. Keep all relevant information in one place so you can make quick decisions and track any detrimental trends.
- Communicate sooner rather than later. The goal of your business is to turn action into revenue as quickly as possible. If someone has a bill coming up, remind them. If someone has a bill overdue, reach out.
Accounting software allows you to send email invoices, accept payments online, set auto-reminders and even set up customer portals so clients can view bills and payment histories. These tools give you all the resources you need to take the hassle out of AR management.
What AR challenges have you faced? How did you overcome them?