As a business owner, you want to increase your company’s value and return on capital. Reducing your accounts receivable is one way to free up cash, which may enable you to implement your strategic growth plans without seeking new capital sources. Or it may allow you to move forward with big plans sooner—when combined with capital sources like conventional business loans, equity funding, mergers and acquisitions (M&A) and other options.
Use these nine best practices for effective accounts receivable management and access to more capital:
1. Prioritize digital improvements.
One technique for accounts receivable management is to make sure as many of your collections as possible involve digital technology. Electronic payments have cash and checks beat as far as speed, efficiency, fraud prevention, and customer preference. The faster money comes in, the faster you get paid and can put it to good use as working capital for your business.
Also make sure that your financial software is up-to-date so your system posts payments and generates reports quickly to help you make smart cash decisions.
2. Make it easier for customers to pay.
If possible, survey your customers to learn what payment methods they prefer—and how they would like to be billed (say, through a portal, snail mail, or at point of sale). Also use multiple communication channels (text, email, letter, etc.) to remind customers when it’s time to pay and reduce late payments.
Accepting debit and credit cards can also lead to quicker payment. Use your bank’s merchant services to improve sales with added convenience. You’ll also be able to offer business customers the option to pay with a purchasing card.
Automating collections minimizes error, reduces fraud risk, simplifies reconciliation, and saves your employees time, too.
3. Use a payment collection website.
With a payment collection website, your customers’ invoices are password-protected, and they can pay electronically using Automated Clearing House (ACH), debit cards, or credit cards. Websites minimize the need for staff processing and allow you to view payments immediately. Attach a link to your payment collection website in every message
Consider looking for financial institutions like Truist that are Nacha Direct Members. Nacha members receive early access to information on changes to the ACH industry—knowledge they can use to help clients prepare for upcoming changes.Disclosure 1
4. Automate high-volume, low-dollar collections.
Service repetitive payments by using ACH transactions (which are simply electronic fund transfers between accounts) to improve collection efficiency and lower costs. Automating collections minimizes error, reduces fraud risk, simplifies reconciliation, and saves your employees time, too.
5. Add ACH to EDI for high-dollar payments.
Electronic data interchange (EDI) software allows businesses to exchange information or data (names, amounts, bank account information) related to payments. Use features like invoice detail and universal payment identification code (UPIC), which is used to secure proprietary bank account information.
Thanks to rising demand for ACH payments during the pandemic, the limit for same-day ACH payments was increased from $100,000 to $1 million.2
6. Re-evaluate your billing policies.
Send invoices to your customers on a regular basis with payment options, terms, and amounts past due. Your process should include immediate contact with customers when their bill is late so they’re aware of overdue balances and how to take care of them. You might also consider billing more than once a month, so customers in week one won’t have an extra three weeks to hold onto their cash before they even receive an invoice.
7. Educate customers on your payment terms.
With clear billing policies in place, you can collect payments more proactively and set customer expectations on how—and when—to pay. Have your sales team discuss payment options with customers before an order is placed and again before work is completed. If possible, make sure invoices coincide with product delivery or completion of service.
8. Consider a lockbox.
If the nature of your business requires cash and check payments, a lockbox service might decrease the amount of time it takes for mailed payments to hit your bank account. It may also be cheaper than internal processing. Simply put, your bank acts like your accounts receivable staff by receiving and opening your paper payments, then processing and depositing them based on your instructions.
Some financial lockbox solutions may be customized to your sector or industry, and there are even versions designed with extra protections for companies that receive a high volume of online payments from their customers.
9. Integrate your accounts receivable.
If you consolidate receivables, all your payment methods—checks, ACH, wire transfers, credit card, and lockbox—are integrated by an outside vendor and can be downloaded to your books, along with detailed reports that provide a comprehensive, real-time view of your accounts receivable.
There are many third-party payment services, so make sure your vendor offers technology that saves you and your staff time reconciling accounts. Your treasury consultant can help you understand the ins and outs and what to look for.