Accounts Receivable: What Every Small Business Needs To Know?

Small business owners and accountants must understand and track accounts receivables to maintain healthy cash flow, get paid faster by customers, and make smarter business decisions.  

We'll cover every aspect of accounts receivable management software in this article, including why it's so critical to track and manage them, and how to do so effectively as a small service-based business.  

 

What is Accounts Receivable?  

Accounts receivable (AR) refers to the total amount that a company owes its customers for services rendered or products delivered. It's usually the sum of unpaid invoices for most businesses and is listed as an asset in all businesses.  

Imagine that there are four unpaid invoices worth $400 each for a content agency. In total, they have $1,600 in accounts receivable. The AR would drop to $1,200 if one of the invoices was paid.  

Now, not all businesses will have to think about augmented reality. Business-to-consumer (B2C) and product businesses are usually paid upfront and therefore don't have any accounts receivable. On the other hand, B2C and B2B service businesses typically have receivables. These businesses perform the service before charging.  

This is especially true if they bill by the hour since they won't know how much to charge until after the service has been completed.  

Tracking your accounts receivable can help you get a more accurate picture of your business's financial condition, as well as other benefits, which we will discuss next.  

 

Why It's Important To Track The Accounts Receivable?  

Small businesses need to keep track of their receivables for a variety of reasons. Among the benefits are as simple as remembering to collect payments and as critical as avoiding cash flow shortages that can lead to business failure.  

The following are some reasons why you should manage your accounts receivable.  

 

1. Try to collect what you've owed effectively  

You will be less likely to miss out on collecting money due to you by customers when you track accounts receivable.  

Collecting what is due to a company is an important part of the accounts receivable process. It entails making certain that customers pay their outstanding obligations on time and efficiently. It is critical to have a well-defined accounts receivable procedure in place to properly recover what is due. The following stages should be included in this procedure:  

• Establish clear payment conditions: Establishing clear payment terms is the first step in collecting what is due. This includes specifying the payment due date, payment method, and any late payment penalties. This information should be conveyed in writing to the customer and stated clearly on invoices and other payment documents.  

• Check payment status: It is critical to monitor payment status regularly to guarantee that customers pay their payments on time. This may be achieved by reviewing the accounts receivable aging report regularly and taking action on any overdue accounts.  

• Send reminders: Sending reminders to customers who are overdue on their payments could be an efficient technique for collecting what is owed. These reminders should specify the amount owing, the payment due date, and any late payment penalties and can be delivered through Email or SMS.  

• Call Follow-ups: Making phone calls to customers who are past due on their payments is another efficient means of collecting what is owed. It is critical to be professional and kind throughout these conversations, while simultaneously being strong about the need for payment.  

• Use incentives: Incentives like discounts for early payment or loyalty benefits might encourage customers to pay their payments on time. This may be an extremely efficient method of collecting what is due, particularly for customers who are unwilling to pay.  

• Implement a collection software: If an organization is unable to collect what is owed, it might consider using accounts receivable automation software, which specializes in collecting past-due payments and can frequently outshine a business on its own.  

You can also analyze payment trends to determine why clients are frequently late with their payments, and then fix the problem.  

 

2. Understand your Short-term Cash flow  

Cash flow is the lifeblood of every business since it allows it to pay bills, invest in new opportunities, and maintain financial stability. Understanding short-term cash flow is crucial for efficiently managing a company's finances. This is especially true for accounts receivable, which is a critical component of a company's short-term cash flow.   

Your business will receive immediate cash when unpaid invoices are fulfilled. As long as you keep track of them, you will be able to estimate future cash flows. As a result, you’ll be better able to determine if it is feasible for you to fund certain operations and investments.  

The accounts receivable process involves keeping track of any money owed to a business by its customers. This money is expected to be paid in a short period, usually between 30 and 60 days. If a company is unable to efficiently handle its accounts receivable, it may face major financial problems, such as cash flow problems and even bankruptcy.  

The importance of keeping track of accounts receivable cannot be overstated. The capacity of your business to collect payment from your customers on schedule is critical for ensuring good cash flow and financial stability. If a corporation allows its accounts receivable to increase without taking measures to collect a payment, it might swiftly become insolvent.  

You should build a systematic method for tracking and collecting money to handle accounts receivable efficiently. This approach should involve regular account monitoring to ensure that payments are paid on time and that any overdue accounts are resolved as soon as possible. You can also use automated tools to speed the process and assure accuracy, such as invoicing and payment tracking software.  

Moreover, analyzing and managing your company's short-term cash flow requires watching your accounts receivable process. You may guarantee that your finances stay stable and that it has the resources it needs to satisfy its responsibilities and seek new possibilities by implementing a systematic method for monitoring and collecting payment. Neglecting the accounts receivable process may have major ramifications for your business, therefore it is critical to treat it seriously and devote the required time and resources to guarantee its success. 

 

3. Avoids shortage in Cash flow  

In most cases, businesses that fail to fund planned investments do so due to cash flow issues. During that time, they can't afford their operating costs. And often, these shortages are caused by mismanagement of Accounts Receivable Software.  

Cash flow is the lifeblood of every business, and keeping it flowing is crucial to its survival and success. Tracking your accounts receivable process, which refers to the money due to your business by its customers, is a critical component of keeping a good cash flow. You may avoid the dreaded cash flow shortage and maintain your business on solid financial footing by keeping a tight check on your process with accounts receivable management software.  

A cash flow shortage occurs when a company's cash outflow exceeds its cash inflow. This can occur when accounts receivable is not properly handled and managed. For example, if your customers pay their invoices late, it might result in a considerable delay in the inflow of cash into your organization, resulting in a cash flow shortage. On the other side, by tracking your accounts receivable process and following up with late-paying customers, you can guarantee that your invoices are paid on time and that your business has a consistent stream of cash flowing in.  

Tracking your accounts receivable process is also important since it offers a clear picture of your company's financial health. You can spot any trends or patterns that may suggest financial difficulties by tracking the amount of money owed to you. For example, if you observe that more customers are becoming overdue in paying their invoices, this might indicate that your company is experiencing financial issues and that you need to take steps to improve your cash flow.  

Finally, managing your accounts receivable process is critical to maintaining a healthy cash flow and guaranteeing your company's financial stability. You may prevent cash flow shortages, discover financial difficulty early, and make educated decisions to better your financial condition by keeping a tight check on the money owed to you.  

 

4. You'll get to know when you should follow up  

Overdue payments can be identified more easily by tracking receivables and following up on them. There are times when a gentle nudge will be all you need to get them to pay you what you're owed. You'll be able to determine your next steps by knowing if it's not.  

The payment due date is one thing to consider. If a payment is past due, contact the customer to check about the status of the payment and to remind them of their need to pay. This can assist to eliminate disputes and allow you to collect payment as quickly as possible.  

Another thing to consider is the customer's payment history. If a customer has a history of making late or missed payments, it may be essential to communicate with them more regularly to remind them of the necessity of timely payments. This might assist you in collecting payment from them before the problem gets more difficult to manage and this can be possible through accounts receivable management software.  

It's also critical to think about the customer's communication preferences. Some customers might want to be reached via phone, while others may prefer to be contacted by email or other means. Understanding your customers' preferences allows you to communicate with them in a way that is most likely to be effective and result in timely payment.  

Eventually, the time of your follow-up with a customer will be determined by several criteria, such as the payment due date, the customer's payment history, and their communication preferences. By taking these aspects into account and communicating with customers in a timely and suitable manner, you can assist to guarantee that your accounts receivable process is managed properly and that you can collect money from your customers on time.  

 

5. Spot the customers who are hard to deal with  

You should run reports frequently to find out who's late on their payments. This will enable you to spend your time building relationships with customers who do their best to pay you on time and don't harm your cash flow.  

Keeping track of your receivables will provide you with a better understanding of the financial situation of your business, allowing you to make smart, numbers-driven decisions.  

Adding accounts receivable to your balance sheet will increase your profitability, which will help you attract investors. Accounting firms will require it to prepare tax returns as well.  

Identifying difficult customers throughout the accounts receivable process can be difficult, but advanced accounts receivable software can assist you in identifying and reducing the dangers connected with these sorts of customers. This software may give significant insights into your customers' behavior, such as payment history, credit score, and communication habits, which can be used to anticipate payment default.   

One of the most important benefits of having accounts receivable software is the ability to track payment patterns. If a customer has a history of frequently paying late, it may signal that they are having difficulty managing their finances and might pose a risk to your organization. By keeping track of this data, you may take proactive actions to limit risk, such as changing payment terms or requesting a deposit in advance.  

The capacity to check credit ratings is another important aspect of handling accounts receivable. A poor credit score might suggest that the customer has a history of financial troubles, increasing the chance of payment default. You can make educated judgments about whether to issue credit to a customer and on what terms by monitoring credit ratings.  

Finally, managing your accounts receivable process using smart accounts receivable software is essential for maintaining your company's financial health. You may detect and manage the risks associated with problematic customers by monitoring payment habits, credit ratings, and customer communication. This will ensure that your organization continues to prosper.  

 

Is Accounts Receivable An Asset?  

The balance sheet of your small business lists accounts receivable as an asset. This is money that your business will likely have shortly, pending any bad debts.  

Some businesses make money by buying unpaid invoices from other companies for a fraction of what they owe and then collecting the full amount. This is called invoice financing or accounts receivable financing.  

Your business can greatly benefit from receivables. You can convert them into funds if you have a cash flow problem. Your Accounts Receivable can be sold to specialized companies that will then pursue the debt. This solution does have a fee, but it helps in an emergency.  

You can write off an invoice as a bad debt if it seems that it will never be paid. That's usually done when a payment is long past the due date or the client refuses to pay.  

It will no longer appear on the balance sheet once it has been written off as a bad debt. When it is paid, however, it ceases to be an asset and becomes cash.  

 

Conclusion:  

I guess you got a great picture of the advantages of having Accounts Receivable. Just like every coin has two sides, Accounts Receivable also has both advantages and disadvantages.  

When you fail to recover the accounts receivable on time, they may turn into bad debts. So, automate your dunning process now with Maxyfi.  

Maxyfi has the industry's best pre-defined communication templates that will optimize your dunning process and ensure faster recovery of your accounts receivable.  

Also, we have pre-loaded workflows suitable for all businesses. So, leave your worries out! Click on Maxyfi.  

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