Accounts Receivable Aging and Cash Flow
June 10, 2015 at 4:05 PM
Cash flow can be a challenge if your business invoices on net terms, due to a time lag between payments on accounts receivables and accounts payables, such as vendors and payroll. If you are a healthcare provider, you also have to factor in insurance claims.
Managing your accounts receivables and monitoring aged accounts can improve cash flow and increase on-time payments. Following some simple accounting procedures can also increase the probability of payment if, as a last resort, you send accounts to collections.
Credit terms should be designed to improve your cash flow but credit policies can affect your customer base. A policy that is too strict may turn away potential customers, slow sales and eventually decrease cash inflow. However, a liberal credit policy will attract slow-paying (or non-paying) customers. A good credit policy that is on par with other businesses in your industry, is clearly stated to your customer AND also enforced, can have a very positive impact on your cash flow. Here are some tips when extending credit:
- Get as much information as possible from the customer. Ask for a cell phone number.
- If you are a healthcare provider, be sure to get information on the “responsible party”.
- Clearly state your terms at time of service / product purchase on the invoice and state DUE DATE.
- State in writing penalty and interest policies and be sure these charges comply with state statutes. In Nebraska you cannot charge more that 16% per annum, or 1.33% per month and that applies to late and/or service fees as well.
- If possible, get a customer signature on the invoice, delivery confirmation etc. This documentation will be helpful if the account ends up in collection or is processed in the courts for judgement.
- Offer electronic payment options. You will pay credit card processing fees, but that’s better than not getting paid on time or not at all. Consider offering the service of paying online. There are many merchant services gateways (i.e.PayPal) that are easy to set up.
- Call within a week of due date if not paid.
- Send statements out regularly – at least once a month.
- Use visual aids on statements. Invest in a Past Due! ink stamp or Past Due! stickers. You can download a Past Due! sticker template on our website.
- If payment is past due, send a letter with the statement asking for payment. Remind them of the different options to pay (check, credit card, PayPal, etc.).
- Send a final notice letter and remind them of the damage to their credit if in collections.
- If they are willing to pay but cannot pay the full amount, offer to set up a payment plan and follow-up with a copy of the plan and get a signature if you can. Even better, set up recurring billing so that the customer’s credit card or bank account is charged automatically. Send statements showing balance each month. This may seem like a lot of work and expense but consider alternatives - not getting paid at all or sending to collections and paying commission.
- If the customer is delaying payment due to dissatisfaction of product or service, send a letter to state your willingness to remedy the situation.