Accounts Payable and Accounts Receivable Best Practices
A pivotal engine to running a successful business is the effective management of account payables and receivables. For those not well versed in business financial terms, accounts payable refers to bills which need to be paid out by the business. Conversely, accounts receivable refers to the payments received into the business. Let’s explore some best practices small businesses should exercise when it comes to effectively managing cash flow into and out of the business.
Side One of the Coin – Accounts Payable
Establish a Strong Record Keeping System
Maintain a systematic approach to track all incoming invoices, bills, and payment due dates. Use accounting software or tools to keep records organized and easily accessible. One of the most common software programs businesses use to track this information is QuickBooks. However, take the time to evaluate software solutions right for you. Another option is to consult with your business banker to review their bill pay options. Automating the process based on your business cash flow is an excellent way to ensure you remain in good standing with your vendors.
Part of being a responsible business owner means paying your bills on time. If you are looking to establish strong business credit, the last thing you need is for your bills to go into collections or get dinged for late payments. Setting up a system and automating the process is a great way to protect your business from such costly mistakes.
Set Clear Payment Terms
Clearly define payment terms with your vendors or suppliers. Most businesses offer the opportunity to pay on net 30 terms which will allow you 30 days to pay your bills. Some will extend payment terms to 45 or 60 days. If your vendor is unable to extend net 30 terms to you based on credit terms, try to build credit with them to earn this right. Ensure your business has enough time to make payments without incurring penalties.
Monitor Cash Flow
Regularly review your cash flow to ensure you have enough funds to meet your payment obligations. Avoid overcommitting to expenses which may strain your cash flow and prioritize your expenses. Be prepared to eliminate expenses less necessary in the event you find yourself in a cash strain. It is better to remove a service or product from your obligations rather than put yourself in a situation where you are unable to pay them. Part of your systematized process should include reviewing your cash flow each month against your expenses. A good rule of thumb is to try and maintain a 60% margin meaning, your expenses should be 40% of your revenue. Be patient with large purchase items and only make large purchases when you can afford it. If it is not necessary to the operations of your business and will strain your cash flow, just say no.
Segregation of Duties Within your Business
If possible, separate the roles of invoice processing, payment approval, and check issuance to reduce the risk of fraud or errors. Of course, this requires reviewing your budget to ensure you can afford to split these duties; however, it is ideal have a specialist in each of these areas to ensure payments are being handled correctly.
While you are developing the different roles for your accounting team, develop a clear process for payment approvals to meet your payment due dates. Implement a clear process for reviewing and approving invoices before payment to catch any discrepancies or incorrect charges.
Flip the Coin – Accounts Receivable
Earlier we touched on the cash flow of your business. Your accounts receivable drives your business cash flow and without proper management of this process, your business can easily spiral out of control. Let’s discuss some ways to effectively manage your receivables.
Invoice Promptly and Accurately
Send invoices as soon as services are provided or as per agreed milestones. Ensure the invoice is accurate and includes all necessary details, such as the services provided, payment amount, due date, and payment instructions. Make sure you have established clear payment terms with the customer prior to rendering services. If you are extending credit such as net 10, 30 or 45, manage this properly in your accounting software to anticipate when this cash flow will be received.
Provide your clients with various payment options, such as pay by credit cards, online transfers, or checks, to make it easier for them to pay. Giving your customers more options speeds up the process and eliminates excuses for slow pay.
Use Automated Systems
Utilize accounting software or tools that automate the invoicing process and send reminders for overdue payments, making the process more efficient. It’s important to have a strong system for managing incoming payments and outgoing payments. QuickBooks is just one option for managing your business’ accounting, but there are other systems which can create workflows and help you manage the entire process from inception to account management and invoices. Softwares such as 17hats and HoneyBook specialize in working with service-based businesses to track your entire management process, including your receivables. As always, conduct your own research to determine the right system for your business.
Follow Up on Overdue Payments and Establish a Collections Policy
Implement a process for following up on overdue payments. Send polite reminders as the due date approaches and escalate communications if payments are significantly delayed. Since you are not in the collections business, it is recommended you delegate this task to someone on your team to ensure it is not neglected.
It is easy to fall into the trap of being the nice guy, and letting your business suffer in the process. Establishing a collections policy becomes essential and should be utilized when a client defaults on their payments. If you encounter chronic late-paying clients, create a collections policy outlining the steps you'll take to recover outstanding debts. When your customer is aware of the consequences, they are likely to make positive adjustments.
Reward your Customers for On-Time or Early Payments
Incentivize good behavior. Consider offering small incentives, like discounts, for clients who pay before the due date. This will encourage timely payments.
Effectively managing both your accounts payable and receivables can be a daunting task for a small business owner which is why having a team to assist in managing these tasks is important.
If you don’t have a team, you could consider outsourcing some of these tasks to a financial firm to ensure you are staying on track in your business.
VAAS Professionals has over 20 years of experience working with small businesses to manage components of their finances such as payables and receivables. Book an appointment with one of our consultants today to discuss your options.