What Happens When You Increase Accounts Receivable
From an accounting perspective, when you increase accounts receivable it means you have earned revenue, but you have not yet collected payment from the client. Increasing accounts receivable happens when you raise an invoice.
If you notice a trend of increasing accounts receivable (AR), pay attention. It could mean you are having problems collecting payment from clients, and cash flow problems are in your future. However, it’s not always a cause for concern. If you have consistent revenue growth and your AR as a percentage of revenue is not increasing, you’re probably ok.
1. Set your receivable payment terms timeline
Your receivable payment terms are entirely in your control, and they are the most important factor in effective AR management. The most common timelines are as follows:
- Due on receipt – the client must pay immediately
- Net 30 – payment is due 30 days after the customer receives the invoice
- Net 45 – payment is due 45 days after the customer receives the invoice
- Net 60
- Net 90 – longer payment terms are rare and are usually only extended to large companies and government institutions
If you are facing rising AR and are having trouble collecting, it is vital that you tighten up your payment terms. People have a greater psychological willingness to pay if the payment is closer to or in advance of the delivery of the product/service, as compared to long after. Furthermore, there are fewer opportunities for emails to get lost or people to shift priorities if the payment is due sooner.
Some business owners say “our industry won’t accept” shorter payment terms. I challenge you to be different. Demand payment in advance or at least sooner than competitors. Customers who value your products/services will see your company as one to not trifle with, and be willing to pay sooner. Don’t let them push you around.
2. Simplify Paying Invoices
If you make it easy to pay, people will pay. It’s that simple. Don’t forget that your clients are dealing with a whirlwind of day to day activities. If your payment reminder comes with a clear and simple next step you are more likely that they will take it. Here’s how:
- Include your complete banking information on the bottom of your invoices for ECH / wire transfers
- Include a link to a payment portal so they can pay by credit card
- Use a proposal software that automatically directs the user to a payment page immediately after accepting (Proposify is a good example), or an online ordering portal
3. Implement Cloud-based Accounts Receivable Software
There are several cloud-based tools that can help with Accounts Receivable management. The most basic central tool is Quickbooks online or Xero. If you use the invoicing functions within these software tools, your clients will be directed to credit card payment options and can be sent payment reminders by email easily. Quickbooks can also be configured to bill a clients’ credit card monthly.
Bill.com is a widely used AR management tool. It simplifies vendor setup and provides your customers with more payment options (e.g. simple click-through to pay with EFT). Bill.com can be used to send invoices and payment reminders. It integrates with your accounting software to reconcile payments.
Use a subscription management and payment tool like Plooto, recurly, stripe, etc. to automatically withdraw funds from a clients’ bank or credit card – after initial setup.
4. Watch Your AR Like a Hawk
Ask your accountant to prepare a weekly or monthly Accounts Receivable summary report. These kind of reports can often be automatically generated. Make sure you look at it during your monthly financial management meeting with your CFO or financial analyst. If you make a point of monitoring your AR you can spot problems early and take action.
5. Call Your Clients
Depreciation always comes up in discussion of cash vs accrual. In our final example, we’ll consider a business that has just purchased capital equipment that will last for 5 years – computer hardware perhaps. The business pays $50,000 out of pocket. Cash accounting would record this as an expense – boom. Accrual accounting asks “shouldn’t we spread out the expense?” The business will benefit from having the computer hardware for 5 years and then have to buy again. So, accrual accounting will show that the computer hardware’s value is reducing bit by bit over the next few years. It will also show an expense incurred bit by bit each year. This smooths out the profitability, so it doesn’t look like the business takes a big hit in year 1 and is extremely profitable in years to come.
Accounts Receivable management is an important function for any business. With a few simple software tools and psychological hacks, it can be easy to manage. If ignored, AR can quickly get out of hand and lead to cash flow problems. A senior accountant or controller is the best person in your organization to watch your AR. Talk to your CFO about implementing new systems. If you need help with AR management, please contact Entreflow – we’re Vancouver Accountants and Toronto Accountants serving businesses across Canada. For one client we found $200,000 in AR and invoicing errors within 1 week.