How to Set Up Accounts Receivable
Who owes you money? Here's how to set up a bookkeeping and billing system to keep track of your accounts receivable.
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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.
