9 Principles of Managing Accounts Receivable

Selling something, whether a product or a service, and not getting paid is brutally painful.

Sloppiness in your billing process will cost you. The ultimate cost is not getting paid.

As I have written about many times before, the cost of a bad debt is more than the actual dollar value lost.

What do I mean?

Consider a bad debt of $1,000. Did you lose only $1,000? Yes, you did lose $1,000, however…

You need to recover that $1,000, right?

Let us say that your business sells computers. On average you sell a computer for $1,000.

The computer costs you $800. You have a Gross Profit of $200 ($1,000 less $800).

To recover that $1,000 lost as a bad debt how many computers do you need to sell?

Five. Yup, gulp, five.

How so? Do the math.

5 computers sold @ $1,000 each = $5,000

The cost of those computers is 5 @ $800 = $4,000

The difference is $1,000, which is your Gross Profit.

This $1,000 bad debt has now been recovered only after selling an additional 5 computers.

So, is the bad debt just $1,000, or $5,000? The bad debt expense is $1,000, that is correct.

However, to get back to where you were before you incurred this $1,000 bad debt you must sell $5,000 worth of computers. Ouch!

9 Principles of Managing Accounts Receivable

1. Develop a clear, internal accounts receivable
2. Understand your new
3. Credit check your new customer
4. Mutually agree terms with your customer before delivering goods or services
5. Issue the invoice immediately after delivery of goods or services.
6. Politely chase your customer before the invoice is due to ensure they are on track for payment.
7. Continue politely and persistently chasing your customer for payment if they have not paid by the due date.
8. Optional – for truly troublesome customers, go ‘nuclear.’
9. Thank your customer for payment as soon as possible after receiving it.

4 Cornerstones of Your Accounts Receivable Procedure

1. Schedule invoice chasing time every week.

Book the time out in your calendar in advance. Never cancel it, never miss it.

2. Maintain invoice communications histories.

Log all communications with every customer about every invoice. Emails, phone calls, letters, meetings – log it all

We use an innovative program with our clients called Chaser. All communication gets logged in a portal for each customer.

3. Regularly assess problem invoices

For larger businesses, this may mean holding credit control meetings. For smaller businesses, this should be covered in regular finance meetings. Always complete bank reconciliation on the day of the meeting to ensure you are working with the most accurate and up to date info.

We stay on top of our bank reconciliations for all our clients daily. For clients who pay by cheque it is critically vital to deposit cheques received within a day.

4. Inform the business of bad payers!

If assessing problem invoices reveals customers with poor payment trends, let other departments in your business who have touch points with them know. This may be sales reps or account managers.

4 Questions You Must Ask New Customers

1. What information do you need to make payment?
2. Who should I speak to in order to settle payment on this invoice?
3. When do you make your payment runs?
4. What are your business details for invoicing purposes?

By getting answers to these 4 questions, you will avoid:

1. Getting paid late.
2. Having to re-do invoices, resulting in more internal labor costs.

In Conclusion

The software we use for many of our clients is called Chaser.

Here are some of the key features of Chaser (great name, isn’t it?):

1. It will send out personalized emails that fit your style of business.
2. It sends these emails in a structured timed way designed to remind your client to pay.
3. It will send text messages.
4. You can use it to make phone calls and the history of all communication (emails, texts, phone calls) will now reside in one portal inside the Chaser software.

Thanks for reading…

**NOTE this blog post was first published by me in May 2021. I have updated it and am re-publishing it due to the critical nature of good accounts receivable management in an economically challenging time…