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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 just a $1,000? Yes, you did lose $1,000, but…

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

Let us say that you sold a computer for $1,000. The computer cost you $800. That leaves $200 to cover your overhead. That is called your gross margin.

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. The bad debt has now been recovered only after selling an additional 5 computers.

So, is the bad debt just $1,000, or $5,000? I say $5,000.

9 Principles of Managing Accounts Receivable

  1. Develop a clear, internal accounts receivable procedure.
  2. Understand your new customer.
  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 AR Procedure

  1. Schedule invoice chasing time every week.

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

  • Maintain invoice communications histories.

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

We use a cutting-edge program with our clients called Chaser. All communication gets logged in a portal for each customer.

  • 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.

  • 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 labour costs

If you are struggling with accounts receivable, message me, we can help.

Thanks for reading…