Managing Accounts Receivable: 5 Steps from an Accounting Expert

Managing Accounts Receivable: 5 Steps from an Accounting Expert

Every 30 days an invoice goes unpaid, you’re writing off a business loss.

Small field service business owners have a habit of extending credit to customers who aren’t properly qualified. When customers are slow to pay, your cash flow takes the hit. You might not be able to make payroll, or buy essential supplies.

In the worst of circumstances, you might go out of business.

Large businesses have the time and resources to do extensive credit assessments on customers. But most small field service businesses don’t have that same luxury.

No matter how big or small your business is, you can learn to properly manage your accounts receivable. We spoke with Quan Ly, Partner at McRally Accounting about how to do just that.

What is accounts receivable management?

Accounts receivable management are the policies and procedures you use to manage overdue sales or non-payments.

You use this process to make sure your customers pay their invoices, no matter what. It ensures that your cash flow is healthy and that your business stays afloat.

5 steps for managing accounts receivable

A solid accounts receivable process can lead to healthy cash flow and profitability, if implemented correctly.

“When you extend credit to someone, you are essentially acting like a bank,” says Quan. Having a process limits the risk for your business.

Here are Quan’s accounts receivable management steps.

Step 1: Determine if credit should be extended to a client

Big businesses can look into the payment history and financial statements of clients before they extend credit. This takes a lot of time and effort which is not always not feasible for a small field service business.

If you have been burned in the past and want to ensure you’re extending credit to the right clients, you can determine if it’s reasonable to extend credit.

Keep in mind that most clients aren’t actively trying to scam you. There are a lot of reasons why even a well-intentioned customer might miss a payment:

For example:

  • They experienced a family or personal emergency
  • They recently lost their job
  • Your client paid but a banking issue prevented the payment from going through

Some explanations might also be your mistake. Payment might have gotten lost in the mail or you have the wrong phone number and email on file. Before you start collecting, make sure you’ve double-checked everything.

Use your best judgment and determine on a case by case basis if your client deserves to have their credit extended.

Step 2: Put payment terms in writing and document your agreement

Before you start any job, make sure that everything about how and when you get paid is documented, agreed to, and understood by all parties.

“You need to set that expectation up-front,” says Quan. “Consider charging interest for amounts outstanding past the due date. You can also incentivize the customer with discounts for quick payments, like within five days.”

Include a clear payment policy in your contracts and quote templates. Walk your clients through it in person to make sure they understand.

On top of this, keep records of all customer communications. This includes:

Tracking all of this sounds like a job on its own but with field service management software you can easily save all of this information and automate a lot of this work.

Step 3: Send an itemized, professional invoice

Send invoices immediately after the service is provided to your client. Your invoice should be complete, itemized, and professional. It should clearly state financial terms and provide instructions for making the payment.

Field service invoicing software like Jobber lets you create and send professional invoices to clients. Customize your template to include your logo, brand colors, and payment terms.

You can also send customized payment links through Jobber, so that clients can click-to-pay as soon as they receive the invoice.

Learn more about online payment and instant payout options here.

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Step 4: Follow-up with an automated invoice reminder

Your clients are busy people and sometimes they just forget they have an invoice waiting to be paid. When that happens, it’s important that you send them an invoice reminder.

Manual reminders can take up a lot of time and it can also be difficult to track with multiple invoices on the go.

You can use an invoice reminder system to keep track all of your sent invoices that are unpaid or past due. Set a customized reminder schedule for overdue payments so you make sure your customers remember to pay and no more invoices slip through the cracks.

Step 5: Step up collection efforts

This is the worst-case scenario if all other methods have been exhausted.

Step up your collection efforts in correlation with the lateness of payment — this is where your documentation comes in handy.

“After all efforts have been exhausted and the customer still hasn’t paid, send a final notice stating that the account will go to collections if that’s what you intend to do,” says Quan.

By the time things have gotten this far, you should be pulling in additional resources to aid in the recovery process. “Consider talking to a lawyer as to how to approach things legally and how to word your communication,” says Quan. “It’s a sensitive area.”

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Collecting accounts receivable: Best practices

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When do you call it a write-off?

If you’ve run through the whole accounts receivable process and still been unable to collect you may be forced to write-off the lost revenue. What does that mean, exactly?

“A write-off is basically a bad debt that is owed but will not be paid,” says Quan. “Usually, you’ve already recognized the income, for example your spreadsheets reflect that you are owed $5,000, but you have to write-off a $5,000 deduction because the money never came in.”

That net-zero on your books may not seem serious, but remember that you have already taken all the expense of providing the service (e.g., labor, fuel, parts and supplies, overhead). “The net effect is that, not only do you not have any ROI, you’re actually taking a loss for your efforts,” Quan explains.

Typically, any invoice that goes unpaid for 60 to 90 days is likely heading towards being a write-off.

“When we run accounts aging reports, we can watch these move into the danger zone,” says Quan. That’s why it’s important to evaluate whether or not you should extend credit to a client and set clear terms before you provide any service.

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