If your business is a body, you – the owner or leader – are its brain. Your workers are its muscles, and cash is the nutrients your business-body desperately needs to survive. We could extend the metaphor further – your clients are the farms that produce the food; your tech composes the senses that keep you connected to the outside world, etc. – but here’s the point: Your accounts receivable is the hand, holding a gorgeous sandwich layered with healthy meats, cheeses, and veggies, but not quite able to give those delicious nutrients directly to the rest of the system.
Just as the hand is arguably humankind’s greatest source of success, the accounts receivable can have exceeding influence over your business. If you want to gain control over your business’s greatest asset, you need to learn more about the power of your accounts receivable.
Where the Money Is
Despite its name, accounts receivable isn’t much like a financial account. In fact, an accounts receivable holds no money whatsoever – but it does hold the promise of money. A business’s accounts receivable is the money rightfully owed to that business by clients or customers after the business has provided goods or services. Another way of explaining accounts receivable is to liken it to a line of credit or IOU: Clients have acquired a product or service, and now they have a limited time to pay off that product or service, or else they should incur financial and legal penalties.
Most companies represent their accounts receivable as assets because AR represents money the business should soon have. Indeed, a large accounts receivable is a good indicator that your business is doing well; not only does it show that your sales staff are bringing in clients, but it demonstrates that your business is delivering on those sales promises and completing the projects your clients want.
There are a few reasons companies choose to operate with accounts receivable instead of demanding cash upfront. Sometimes, businesses cannot be certain how much a product or service will cost until it is complete. For example, marketing firms tend to bill clients after a campaign is complete, so they can accurately record the time and resources consumed; similarly, electricity providers tend to bill customers at the end of cycles after monitoring actual energy usage.
Still, some organizations only offer the service to special or exceedingly loyal clients because offering services on credit can be risky. Indeed, when an accounts receivable is poorly managed, it severely impacts the business.
A large accounts receivable is a good thing – unless it stays a large accounts receivable and never manifests into real cash. If your clients are slow to pay their invoices, your accounts receivable is less than useless; your cash flow will dry up and your business will die. There are dozens of ways your accounts receivable can stop providing the nutrients your business-body needs, and most of them are the fault of business owners and leaders:
- Invoices are confusing or riddled with errors.
- Invoices never make it to clients.
- Accounting departments are insufficiently staffed.
- Accounting departments lack appropriate tools.
- Clients are unable or unwilling to pay.
Regardless of the cause of unfulfilled accounts receivable, it is imperative that you resolve the issue quickly and efficiently. The following tools and tricks should help you avoid any accounts receivable nightmares before they manifest into real dangers to your business.
Handling Your A/R
First and foremost, the best way to have a profitable accounts receivable is to be organized. As soon as possible, you should have a routine process for accepting sales and generating comprehensible and accurate invoices. To smooth your billing process, you might integrate software tools like QuickBooks or FreshBooks.
If you feel uncomfortable waiting for your accounts receivable to pay off, you can speed up the process by participating in accounts receivable financing, also known as invoice factoring. This financial service allows you to sell your unpaid invoices to a factoring company at a slight discount. You get the majority of the invoice right away, then the rest minus a fee once your client pays.
Even if you do factor your invoices, you should learn to communicate effectively with your clients. From the outset, your clients should have a clear picture of costs and fees associated with your products or services, and they should understand your business’s payment structure and timeline. You should send them a full explanation of your payment terms before you send your first invoice, so they have time to understand your expectations – and potential penalties should they risk not paying.
Not every business uses accounts receivable, but many simply cannot avoid it. You must learn to manage your accounts receivable as well as you use your own hands – or else your business will surely starve.