Practicing accounts receivable management is one of the easiest ways to ensure your business has a healthy cash flow. Unfortunately, not all businesses know where to start with accounts receivable, or are simply engaging in bad habits. Accounts receivable is what keeps a business running, so if you’re not on top of your A/R game, you may have an accounts receivable problem.
Step up your A/R game by checking if you have any of these 10 signs of unhealthy accounts receivable management.
SKY HIGH DSO
If you have a long DSO (days sales outstanding) cycle, then your business is most likely offering a lot of credit to clients. Allowing bills to go unpaid too long leads to a likelihood that you will not collect 100 percent of what is owed. Furthermore, if your DSO tends to fluctuate often, you probably aren’t planning ahead financially. It is normal for a little fluctuation, but not on every bill.
If you know that you are owed money, but don’t know when and from whom, you have a serious accounts receivable problem. Each and every month you should be tracking which invoices are due. This is one of the most important credit management function there is. Take note each month of who is paying late, and whether it’s a habit for them.
NO CREDIT POLICY
Although it is great that companies want to do business with you, there is no need to jump in right away. Do a background check and a credit check to see if you can trust that this business will pay you on time. Have a credit policy in place so it becomes commonplace to check on new businesses’ credit, and even check in on longstanding customers now and again.
NO PAYMENT COMMUNICATION
Customer communication is key to guaranteeing you get paid on time. You should be aware of when the last time a customer has been contacted, whether it was via email or phone call and what their response was. If you have been in contact with a customer and have created a deal to getting their invoice paid, they should be treated differently than the no show, no call, no payment customer. Without tracking customer communications, it’s hard to keep it all straight.
YOU KNOW YOUR COLLECTIONS AGENCY TOO WELL
What’s the tell-tale sign you have an accounts receivable problem? You know your collections agency too well. If you feel like you’re constantly sending over invoice to collections, then something isn’t going right in the accounts receivable department.
USE OF INVOICE FACTORING
If you were getting paid on time, this wouldn’t even be a necessary option. Don’t waste your hard earned money because customers that aren’t paying on time are putting you in a bind.
LACK OF ACCOUNTS RECEIVABLE MANAGEMENT
If there is no one with a watchful eye over your accounts receivable, there is definitely a problem. Without a designated person (or persons) to watch over the accounts receivable, then surely many clients are getting away with well over 30 days in late payment.
COLLECTING AFTER 90 DAYS
Hopefully you aren’t waiting this long to collect on unpaid invoices. Invoice reminders and collection calls should be sent out in 30 day blocks, even earlier if you can! If you’re waiting three months to get in touch with a client who hasn’t paid, they surely will not take you seriously.
LATEST IN THE INDUSTRY
Each industry has an average DSO. For some it’s pretty quick, for others it can be daunting. Your DSO should be in line with the average for your industry, or even better! Be sure that you’re not lagging behind other similar businesses.
NOT USING AUTOMATED ACCOUNTS RECEIVABLE SOFTWARE
All of the above tips are daily tasks that can be put on automation. Maybe you read through this list and thought, “I do all of these, so why is my cash flow still bad”. Most likely it is because you are wasting your time doing a lot of simple, but time wasting, tasks manually.
These tips are easy to get in a habit of and do daily. Managing accounts receivable is the best and easiest way to ensure you have a healthy cash flow in your business. These are easy habits to create, and even easier if you automate them by using an accounts receivable software.