How to Set Up Accounts Receivable
It's never fun to ask people to pay up. Having a formal, professional system for keeping track of accounts receivable and billing not only will make the process relatively painless for you, but also help your clients' pay you promptly.
Creating a method for timely and accurate billing is just one step to creating a well-oiled bookkeeping system. But just a couple baby steps can have immediate impact in relations with your clients. Good documents with your logo and consistently accurate figures can make you look like a large corporation – even if you're operating out of a basement home office.
"It can make your business feel a lot more established and professional, right away," says David Barrett, the founder and CEO of Expensify, an online bookkeeping tool. "Your clients will appreciate getting your billing information in a quick and clear way – and will feel a need to reciprocate in how they pay you."
If you're only dealing with a couple regular clients – or issue just a handful of invoices a quarter – setting up a solid accounts receivable system is neverthless worthwhile because it lays a solid foundation for the future. We've compiled a guide to getting started on the right track – and incorporating best practices – to managing your accounts payable.
Dig Deeper: More Accounts Receivable Basics
Setting Up Accounts Receivable: Getting Organized
The first step to realize is that you likely already have an accounts receivable system – however meager or malfunctional it may be. For offline, manual-entry accounts payable, Excel is still the standard. If you're already comfortable with a program like QuickBooks, or are willing to take a class or hire a coach to get you started, that's another option for record-keeping. If you like online money-management programs like Mint, you might work well with an online system such as FreshBooks.
Once you pick a system, you should start loading billing information kept in your head or on your Outlook calendar into the system. Your basic setup, whatever accounting software or spreadsheet you choose, should include a listing of all open invoices and balances, as well as either monthly, weekly, or per-project billing capability.
You should also make sure there is a way to print invoices in hard copy. Although bills can be sent by e-mail, some of your clients may prefer receiving a hard copy of a bill. You can choose to use an automated service, such as billing handled by FreshBooks, or you can task an administrative employee with printing and mailing hard copies of your invoices.
Next, you must decide who will handle billing. Kathryn Amenta, a San Francisco-based financial advisor, suggests you handle it at least for a time. "I would recommend a business owner understand their finances fully before they turn it over to someone else to handle," she says. "It's super important as an owner to have a finger on the financial pulse. That's the bottom line – that's why you're in business."
Dig Deeper: Tending to the Business of Collecting Money
Setting Up Accounts Receivable: Invoice Schedules and Other Guidelines
The structure of accounts receivable bookkeeping can vary tremendously depending on your client base and service or product type. But whether your billing is going to be consistent from month to month or includes a new client list every week, you'll want to back up a step.
Before taking on a new client, present to them the terms of the transaction. This can be a payment policy on your sales-based website, or a cluase included in the formal contractual agreement signed by both parties before the start of your service – or something in-between. The important thing, experts say, is to put the terms of payment in writing.
For example, a terms-of-sale agreement should always include is payment schedule. To determine a payment time-framethat will be reasonable for both you and your clients, consider industry standards as well as what your business needs to maintain steady cash flow. Say you decide 30 days is a reasonable expectation. Not only include that fact in your agreement, but prepare to include pay-by dates on future invoices. Consistency is crucial in maintaining clients' respect and trust.
Additionally, you'll want to establish guidelines for how much credit you're willing to offer to clients. It may be no more than a basic formula that leaves room for you to be flexible about clients' payment schedules. One question that might be helpful to ask in deciding a credit policy is: How long should a client be a reliable business partner before you put yourself at risk? Another: Do you want to treat large corporations and small companies differently?
Dig Deeper: How to Create a Smart Credit Policy
Setting Up Accounts Receivable: Mastering the Invoice
Once your clients clearly understand the terms of payment, it's time to create the invoice. Every invoice should include the following:
• The product or service (listed by number of hours worked or by project) sold.
• A breakdown of expenses involved (if relevant).
• The amount due.
• The due date.
Your invoice should be a clean, straightforward document that features your company logo. It is common to offer a percentage discount – however tiny – for prompt payments. Some small businesses also offer a tangible reward to clients who don't fall overdue – say, a gift certificate, future discount on your services, or tickets to a sporting event.
The complex psychology of invoicing also dictates that you would be smart to exhibit certain element of grace, according to Mitch Solway, the vice president of sales and marketing at online bookkeeping and invoicing company FreshBooks, which has recently studied its customers best practices in accounts receivable.
"One of the best pieces of advice we've uncovered in recent months is to think carefully about the actual wording on the terms you apply on your invoices," Solway says. "Being polite and asking for payment within 21 days seems to get our customers paid a lot faster than terms such as 'due on receipt' or 'due immediately."
In other words, treating customers in a human way can actually create good-will and speed up payment.
Dig Deeper: Collections in a Tough Economy
Setting Up Accounts Receivable: Drafting a Collections Policy
Even for businesses with all the best accounts receivable practices in place, some clients never seem to keep up with payments. In general, you want to give these late payers the benefit of the doubt – but you also need to stay true to your business's bottom line. Setting up a clear collections policy at the outset of establishing an accounts receivable system is the best way to lay a groundwork for collecting overdue amounts.
Amenta suggests being kind but not meek in the process – after all, your clients should know what to expect if you've already laid out their payment process at your relationship's outset. "It's definitely necessary to have a follow-up plan for overdues," she says. "Is it going to be a phone call? Is it going to be a series of emails or a hand-written note?"
You'll want to be establishing a timeline of steps to take on collecting – say, first a call, then a note a week later, then a call daily until your debtor has established with you his or her ability to pay.
Consider how much flexibility you can offer to a client in a dire situation. Amenta suggests allowing good clients an opportunity to establish a payment plan. But if you're in real doubt over whether a client has the ability to pay, after you've given them an extended payment window, it's okay to ask for assurance. Asking for references who have found the client reliable even in tough financial times is one option; another is asking for past balance sheets so you can analyze whether there's a seasonal cash flow issue for the company.
If you're anticipating some collections will present real trouble for your business in the future, take some time early on to research your state's collections laws, so that you will know what your steps must be before taking a seriously overdue debtor to small claims court. For information and commercial lawyer referrals, check out the Commercial Bar Directory.
Dig Deeper: How Much are You Actually Lending Your Customers?
Setting Up Accounts Receivable: Knowing When To Enlist Outside Help
From the beginning to the end of establishing a quality accounts receivable system, there are some circumstances under which you might want to employ a bit of assistance.
1. System Set-up. While most experts agree that you, as a small business owner, need to keep your eyes on the bookkeeping at all times, it is often wise to bring in outside help when you're implementing a new software system.
2. Establishing Credit for Customers. If large clients do not want to pay at the outset of a service or transaction, or in a proscribed period thereafter, you'll want to enlist a Credit Bureau service or credit-rating agency to review the credit of customers, so they can get a green light to spend with you—and you can have peace of mind in serving them. The fee is typically $1,000 per every 100 credit checks. If you're working with an number of high-cost new clients, working with a credit agency can be worthwhile to avoid trouble.
3. Collecting Overdue Accounts. After you've implemented your collection plan, including multiple conversations with the client who isn't paying up, you might feel like giving up. Enlisting a collections agency is another smart option. If it seems like the step could offend a customer, just think: would you rather take them to court?
Dig Deeper: Dealing with Missed Payments
Setting Up Accounts Receivable: Additional Resources
For managing collections, check out this list of collections laws and how they vary by state.
With a variety of training and professional development programs for people working in accounts receivable, the non-profit group International Accounts Receivable Professionals can be a great training resource.
If you're just getting started and find yourself unfamiliar with some of the terminology involved in accounts receivable, check out this thorough online glossary.
The Financial Managers Society is another professional organization where you can look for advice, tools and guidance.
You can check out form templates at the site of the International Accounts Payable Professionals.
Dig Deeper: Managing Your Receivables
CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer
Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.