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Money, Money, Money: Managing your Business’ Accounts Receivable

by | Apr 28, 2024 | Accounting

It’s all nice and swell for your business to have great sales, but if it cannot collect on its outstanding invoices, it’s all for nothing. The size of a business’ accounts receivable (the amount of money owed to it by creditors) and the ability to collect on those debts is a key to your business’ success.

Unsurprisingly, the best way to keep your business’ accounts receivable (often abbreviated to AR) to the bare minimum is to try to not even have them all. Instead of billing after services are rendered, you can ask for payment before starting the work. Alternatively, you can insist upon receiving payment at the time of delivery of your product and refuse to deliver otherwise.

Another approach is to ask for an upfront deposit. Requesting a deposit also forces your client to show that they are serious as they need to pay before work starts. This will normally weed out the worst of your non-paying clients.

If you will be incurring any out-of-pocket expenses as part of the services you render to a client, consider, at a minimum, taking a deposit to cover those expenses before starting any work. This ensures that you collect at a minimum those out-of-pocket expenses which makes sure that you don’t lose money on a job.

Another good habit is to bill on a regular basis and before your invoice balance grows large.  Remember that the greater the balance owed, the more challenging you will find it to collect. You also see that the greater the balance owed, the more you will be compelled to negotiate on that amount since holding that non-payment over you gives your client leverage. To avoid such situations, try to bill at the least monthly and potentially even on a weekly basis depending on the speed at which your accounts grow and the basis at which you need to pay your own expenses.

If there is one part of your business to start to automate, it’s for your invoicing as this will keep your billing regular and thereby increase the chances that you get paid on time. Ideally, your invoices should go out automatically on some recurring schedule without you having to invest too much time in the process.

Don’t leave the delay to pay your invoices as an understanding between you and your client, rather your invoices as well as the underlying contract with your client should clearly state the number of days which they have to pay. For many industries, the typical delay to pay is 30 days, but this delay is normally shorter when a business is customer-facing as opposed to just selling to other businesses. It’s also good practice to put the actual due date on each of your invoices to avoid any doubt on the matter.

In addition to stating the delay to pay, each invoice and the underlying contract should include the interest rate applicable to all overdue accounts. Remember that you need to include the annual interest rate as opposed to only a monthly rate to protect yourself from the provisions in the Interest Act (Canada) which reduces most interest rates to 5% per year if they are not quoted on an annual basis. Generally, in business, the applicable interest rate is between 1% and 2% per month, so to say, between 12% and 24% per year.

To increase your chances of getting paid on time, send a reminder email to your clients prior to your invoice even becoming initially due. For example, if the term of your invoices is 30 days, send a reminder email one week before its due date. This will also give you an earlier heads-up if there is a problem.

If all those techniques don’t work and you are still faced with overdue accounts receivable, your approach should be to deal with each of those accounts on a sliding scale of severity. First, you want to start with a general reminder that the account was due on such and such date, remains outstanding and payment is requested. Next, you want to follow up with a more forceful reminder advising them that their account is overdue and that it’s essential that they proceed to payment promptly. After that, you want to insist upon payment and advise them that a payment is not received by a given date, their account will be sent to a collections agency or to your lawyer. Finally, the account should be transferred to the collections agency or to your lawyer, and then you can let the professionals handle it from there. Unfortunately, there is a cost to both of those options, so that normally means that you won’t be collecting 100 cents on the dollar.

The most important and often the hardest part of the collections process is to fully cut your client off from receiving any more products or services once their account becomes delinquent. This puts substantial pressure on your client to pay if they need more of your products or services on a continuing basis. This also avoids increasing the amount owing on your problematic account when, in fact, your goal is to reduce it as much is possible.

At least during the initial step or two of the collections process, make sure that you ask your client if everything was alright with the products supplied and the services rendered. It is possible that there was some issue which is the source of the nonpayment as opposed to a lack of funds or refusal to pay. If such is the case, it’s better to know sooner rather than later to be able to take action to resolve the situation. However, make sure that your proposed solution is conditional upon payment being received by a certain date and that if it is not, your offer is no longer valid and is deemed to have expired.

In addition, remember the old adage that the customer is always right. Take your customers’ complaints seriously as one disgruntled customer can really sully the name of your business and disincentivize many others from doing business with you. Normally, it’s better to offer a discount on one invoice to address a problem and keep the customer happy than to fight over a small amount which you may never actually end up collecting while risking losing other business over the situation.

Although getting good at managing your accounts receivable is something that comes with practice, establishing good processes from the start makes a huge difference. Take the time to put such processes into effect from day one as this will ensure that you are ready to deal with problems when they occur.

So go ahead and take the time to put some of these processes in place to spend more time focusing on your business and less time collecting your overdue accounts. Good luck!

Matthew Meland

Matthew Meland

Lawyer at FFMP, entrepreneur, blogger

As a lawyer with a diversified civil and commercial law practice, I often work with start-ups and small businesses. On the side, I am involved in several businesses from education services to high-tech.


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