By Yhordan Serpentini | March 31, 2023
Managing accounts receivable can be a daunting task for any business owner. It involves tracking payments, following up on outstanding invoices, and ensuring that your cash flow remains healthy; however, even the tiniest mistake in this process can cause major problems for your business, and even harm your business’s reputation. Similarly to last week’s accounts payable mistakes, we’ll explore in this blog the five most common accounts receivable mistakes that businesses need to avoid.
1. Not Setting Clear Payment Terms
One of the most common mistakes businesses make when it comes to accounts receivable is not setting clear payment terms with their clients. This can lead to a host of problems down the line, including delayed payments, unpaid invoices, and even damaged client relationships. Establishing clear payment terms with your clients is crucial for several reasons. Firstly, it sets expectations and ensures that both parties are on the same page when it comes to payment deadlines and methods. This can help avoid any confusion or misunderstandings later on.
Secondly, having clear payment terms in place can help you avoid financial loss. Late or missed payments can have a significant impact on your cash flow, making it difficult to pay your own bills and meet your financial obligations. By setting and enforcing clear payment terms, you can ensure that you receive payment in a timely manner and avoid any unnecessary financial difficulties. To enforce your payment terms, it’s important to have a strategy in place. This could include sending out invoices promptly, following up with clients who have overdue payments, and offering incentives for early payment. You may also want to consider implementing late payment fees or penalties to encourage clients to pay on time.
Another strategy for streamlining the accounts receivable process is to use technology. There are a variety of software solutions available that can help you manage your accounts receivable more efficiently, from automating invoice creation to sending out payment reminders. By using technology to your advantage, you can save time and reduce the risk of errors in your accounts receivable process.
2. Not Following Up On Overdue Payments
When it comes to business, both clients and suppliers must have a level of accountability. If your clients aren’t paying you on time, it is your responsibility to follow up on the overdue payments to communicate, follow up, and salvage the consumer/buyer relationship. While it may seem like a minor issue, the cost of waiting to follow up on overdue payments can be substantial.
Waiting to follow up on overdue payments means that your business is missing out on important cash flow. This can lead to a range of problems, including difficulty paying bills, missed opportunities for growth and expansion, and even bankruptcy in extreme cases. To avoid these negative consequences, it’s crucial to have clear payment terms and expectations in place from the outset, meaning that you need to clearly communicate with customers about when payments are due, what the consequences of late or missed payments are, and how they can make payments and/or make up overdue payments.
3. Not Sending Invoices On Time
Delayed invoicing can have a significant impact on your cash flow and business operations, leading to a host of problems that can be difficult to overcome. The cost of delayed invoicing can be significant. Late payments can cause cash flow problems, making it difficult to pay bills, meet payroll, and invest in the growth of your business. This can lead to missed opportunities, lost revenue, and even the closure of your business.
Streamlining your invoicing process can be a great way to avoid making this mistake throughout your time as a business owner. This simply means ensuring that you have a clear understanding of your billing cycle, setting up automated invoicing systems, and regularly reviewing and updating your invoicing policies and procedures, as well as having clear payment terms and policies related to those said terms.
4. Not Keeping Accurate Records
As mentioned in last week’s blog, regardless of whether you’re the one receiving or paying, not having accurate records is a serious issue that can drastically affect or impact your business’ stability, negatively. Failing to reconcile your accounts receivable records with customer payments can lead to a number of problems, including lost revenue and increased bad debt.
Thankfully, like all other problems, there is a way to avoid causing them. Regularly reconciling your accounts receivable records with customer payments is one of many ways you can avoid keeping inaccurate records. This simply means that you are comparing your records of outstanding invoices with the payments you’ve received from customers, which can be a great way to quickly identify any discrepancies and take action to resolve them before they become bigger problems.
5. Not Having A Collection Process In Place
It sounds a little bit like common sense to have a collection process, but even the most obvious instances tend to get overlooked at times. Having a collection process provides a structured approach to managing accounts receivable, helps businesses stay on top of outstanding invoices, ensures timely payments from clients, and helps avoid the need for costly legal action to recover unpaid debts; however, many businesses make common mistakes when it comes to collections. These mistakes can lead to delayed payments and other problems that can have a negative impact on a business’s cash flow, as well as overall financial health.
Disclaimer: This blog is not intended for financial advice
Sources:
- Fisher, R. (2021, August 6). 6 accounts receivable problems to avoid: Highradius. HighRadius Resource Center. Retrieved March 31, 2023, from https://www.highradius.com/resources/Blog/how-to-avoid-account-receivable-problems/
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