Accounts receivables guide for small businesses

If you sell goods or services to your customers on credit, your business will always have an accounts receivable balance in your general ledger. Accounts receivable reflects the amount of money owed to your business from the goods and services that you provided your customers on a credit basis. It’s important for business owners to manage their accounts receivable properly, from initial credit application to collection of the accounts receivable balance. For non-card and non-cash sales, a small business needs a comprehensive strategy to maximize the value of accounts receivable.

Automate: Accounts receivable programs are inexpensive and generate professional-looking invoices. These programs allow you to enter new credit-based sales, track payments and report unpaid items by age. A/R programs usually integrate with other parts of an accounting system, including general ledger and financial reporting. Unless your small business makes very few sales and you have a lot of time on your hands, it’s not hard to justify the few hundred dollars needed for a typical small business accounting package.

Credit Management: The Fair Credit Reporting Act allows you to buy a credit report on a customer seeking credit. These reports reveal previous credit problems and assign a score to each consumer. You can reduce the number of A/R collection problems by approving credit only for customers with a relatively high minimum credit score. The downside is that you may disqualify potential good customers. However, to protect its profit margins, a small company might decide it better to reduce potential collection problems at the expense of lost sales.

Third-Party Collections: You can hire a bank or similar agent to receive and credit payments on your behalf. The third-party might receive payments electronically or through the mail. A “retail lockbox” is a facility to intercept and record these payments onto your accounts receivable. This may be beneficial to a small business that has many customers who mail in checks for an ongoing service or a recurring merchandise order, such as a wine-of-the-month club. The same lockbox service can extend to electronic accounts that customers access to make payments over the Internet.

Factoring: You can sell your accounts receivable for a percentage of its balance, a practice called factoring. A bank or commercial factor pays you a specified percentage upfront, such as 80 per cent, of the A/R balance, relieving you of the need to wait for collections. When the factor collects the bill, it remits part of the remainder to you and keeps some as a fee. This can be a useful tool if your working capital is low, and you need to get your hands on some quick cash. Also, by receiving most of your cash right away from the factor, you can purchase new inventory sooner and thus accelerate your inventory turnover. You still may have to write down unpaid receivables, but only the remainder you would have received had the factor collected.