Tips for Streamlining Accounts Receivable

If you feel you are not getting paid promptly and in full by your customers, here are some simple ways to upgrade your billing system.

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When clients owe you money, you shouldn't have to move heaven and earth to collect it from them. If your accounts receivable system is a few years old, or still just consists of an Excel spreadsheet and invoice letters, then it is probably time for you to take some simple, additional steps to ensure that you get paid promptly and in full.

If you're spending an hour a week on managing your billing process, experts say that something is amiss. Slow collections can cost you tremendously over time, in the form of wasted labor, poor cash flow, and inaccurate financual forecasts. Plus, a solid accounts receivable system has a tendency to being self-fulfilling: The more professional your billing system is, the more likely it is that your clients will pay up in a timely manner.

"If you've taken the leap of faith to go into business for yourself, driven by the passion for what you do, you want to spend less time fretting over the books and a lot more time doing what you're great at—so you can get paid for it," says Mitch Solway, a small-business finance expert who is the vice president of sales and marketing for online expense-tracking software FreshBooks. "But it's still a critical piece of your business."

Dig Deeper: Best Practices for Accounts Receivable and Collections

Streamlining Accounts Receivable: Invoicing Software

If you are sending out – either digitally or in hard copy – more than a handful of invoices a week, you should be using an accounting program such as QuickBooks or Peachtree. Or, if you like the style of online money-management programs, you might work well with an online system such as FreshBooks or Outright. If you're not already comfortable with any new software options, you can take a class or hire a coach to get you started. What's not an option is letting someone else do it all for you, says San Francisco-based financial advisor Kathryn Amenta.

"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."

Once you know the process thoroughly, good software can help you track receivables, including how many invoices have been sent, how many have been viewed, how many have been paid, and how much remains outstanding. The only thing to keep in mind when you automate: Before you adopt a new software or billing process, make sure your clients are notified ahead of time of any changes that will affect them or how they receive or pay their bills.

The best invoices include every relevant piece of data, including hours billed if you're a service, or all the specs of a product if you're a sales organization. Being clear with clients avoids the need for follow-up questions on items that may be confusing to anyone who receives them, and that can delay payment. Your invoice should be a clean, straightforward document that includes your company logo. That said, it can contain a certain element of grace, suggests 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, giving customers a bit of flex room actually appears to create common good-will and speed up payment. That's just one example of the complex psychology of money manifesting itself in the receivables process. Knowing your clients well, and understanding what motivates their accounting – and accountability – can help you implement other strategies in the future to get paid without being unfriendly.

Dig Deeper: How to Choose Small Business Accounting Software


Streamlining Accounts Receivable: Optimizing Your Billing Process

Whatever software you choose, the goal is to stay on top of accounts and billing. That means monitoring when an account opens, the timeline of work being done, and when precisely a bill is to be sent. That can vary depending on the type of product or service you provide, but terms of payment should be clear to all clients before you provide anything to them.

Setting up expectations and payment standards first allows you to be in control from the get-go. 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 part of a 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.

The most basic item a terms-of-sale agreement should include is payment schedule. To determine a timeframe for payment that works for 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. You should include that fact in your agreement, and note pay-by dates on future invoices. Consistency is crucial in maintaining clients' respect and trust.

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Christine Lagorio

Christine Lagorio is a writer 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 executive editor of Inc.com.

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