Jump to Main Content
USA flagAn Official Website of the United States Government
Starting a Business

Blogs.Starting a Business

Register

Bookkeeping Basics, Part 2: How to Set Up and Manage Accounts Receivable

Comment Count:
6

Comments welcome on this page. See Rules of Conduct.

Bookkeeping Basics, Part 2: How to Set Up and Manage Accounts Receivable

By Caron_Beesley, Contributor
Published: August 26, 2013 Updated: August 26, 2013

If you’re new to business or are out-growing your current spreadsheet-based accounting system, it might be time to look at establishing a more formalized accounts receivable process. In part one of this two-part series on bookkeeping basics, I covered the steps you need to take to set-up and manage accounts payable (i.e. the bills you need to pay) and using it as a tool to help you manage cash flow and inform your overall budgeting management process. As a new business owner, whether you are a freelancer or multi-employee company, it’s equally important to keep track of who owes you money!

A professionally managed accounts payable system not only ensures you can track and manage what you are owed, who has paid you and what’s outstanding; it will also give your business a professional image and ensure your figures are in order when it comes to tax season.

Here are some tips for setting up a workable accounts receivable system that will streamline your billing and receipts.

Setting Up Your System

Whether you are using a traditional spreadsheet or an online accounting program such as QuickBooks, Outright, or Expensify, you’ll need to start collating all your open invoices and balances. You may also want to integrate your time sheet into the same system – certain software lets you streamline the process by auto-generating invoices from electronic timesheets.  Automating the entire billing system is another option – if you are generating more than 5-10 invoices a week, then it may be worth looking into. Read this blog for tips: Going Beyond the Spreadsheet – Automate Your Billing Process with Online Software.

Establishing Your Terms of Payment

Each piece of work you undertake is likely to be different – if you’re an independent contractor, your hourly rate may vary, and perhaps you charge one project by the hour but others for a single project fee.  You may also have a regular set of clients whom you invoice or it may change from month to month.

All of these variables will impact the structure of your accounts receivable. So it’s important that both you and your client are in agreement as to how often they will be billed and the schedule for payment. Some clients may insist on 30 days; others may be more favorable to paying you in 15 days. So establish these ground rules in your contract and be sure to include a reminder in your invoices and as a note in your receivables system.

Invoicing Like a Pro

Use your invoice wisely. The goal is to give the client enough information for them to be able to approve and process it quickly. It’s likely that the invoice will need to be rubber-stamped by more than one person – usually your point of contact for the work, as well as accounting and even the CFO or business owner. Have a clean, professional template that includes your logo and other business information. State your payment terms clearly and be specific. For example “Payment due in 30 days” is less vague than “Due upon receipt.” Include the hours worked (and the hourly rate as a reminder) and the specifics of your service. If the project is ongoing, break down what portion you are billing for this month.

If you are an independent contractor, state clearly who the payment should be made to – especially if you operate under a “Doing Business As” or trade name, but retain a bank account in your own name – you want to ensure the check is written to you.

If you incurred any expenses that are billable to the client (and pre-approved as such) also include these as separate line items.

Collecting Passed Due Invoices

Like death and taxes, not getting paid on time is inevitable, so be prepared for this. There’s often a valid reason for non-payment. The invoice could have been misplaced, or the client needs to iron out some kinks with their purchase order system – who knows!

If the invoice is only a few days past due, reach out to your client contact with a gentle reminder. Ask them if they actually received the invoice and if they have any questions about it. Your goal here is to get a confirmation that you’ll receive payment by X date, so that you can manage and plan your cash flow accordingly. So keep plugging away till you get this assurance. Remind them of your agreed payment terms and ask if you can speak to accounting if you’re not getting the answers you need.

If matters don’t get resolved, SBA guest blogger Barbara Weltman offers some additional collection and tax write-off strategies here: Getting Stiffed: What Can you Do?

In addition, if a client starts to become a repeat problem, tackle the issue head-on with a meeting to review matters. Try to be as flexible and courteous as you can as you work towards resolution; it could be a simple resolution such as shifting your invoicing to the middle of the month.

When it’s Time to Get Help

According to a 2009 survey by finance systems specialists, CODA, 25 percent of small and medium businesses estimate that at least $5,000 a month in income is delayed due to invoicing errors, with 17 percent seeing payments amounting to $50,000 delayed due to invoicing errors.

While you want to ensure you are keeping an eye on your receivables, if you are spending too much time in the weeds billing clients, what are your options?

Well, a bookkeeper can help you keep your records straight, or an accounts receivable can help you handle billing and collections so that you don’t have to. An attorney or legal advisor is a good resource to have lined up in advance, should clients not pay up on time. If you have an accountant, seek out their advice on the best options for your business as well as your long term financial health. You can also get free advice and mentoring on accounting processes from organizations like SCORE.

More Information

For more business accounting tips, check out SBAs free online learning course: Introduction to Accounting.

Related Articles

 

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Tracking receivables is an essential part of managing your company's cash flow. Without a steady cash flow, many small businesses tend to borrow more and more money to meet their working-capital needs. Eventually it catches up. Lack of working capital is the principal reason small businesses fail.
This blog is very informative for those who are new to business. Generally those who are new to the business are generally not aware about the bookkeeping techniques and accounting. By reading this article the business owner gets some idea about the bookkeeping. Bookkeeping is nowadays thought online and many quick books and tutorials are there which are very helpful for learning bookkeeping. (A link was removed from this post)
An eye opener blog on bookkeeping, which of many of takes it lightly & due to internal error in accounting the payment get unnecessary delayed, if the errors are rectified well on time then financial transaction taking place wouldn't that problematic by the end of month. Also a profession bookkeeper should be recruited to fulfill the need of accounting summary.
Good article. Another important thing to note about the benefits of using a good A/R system is cash flow. Without knowing the increases or decreases in periodic A/R, it is impossible to identify the flow of cash. The same is true for Accounts Payable as well.
Such great information!! I will be sharing this with our accounting department, I think it would be a great for them to have this knowledge if they don't already!!
An eye opener blog on bookkeeping, which of many of takes it lightly & due to internal error in accounting the payment get unnecessary delayed, if the errors are rectified well on time then financial transaction taking place wouldn't that problematic by the end of month. Also a profession bookkeeper should be recruited to fulfill the need of accounting summary.

Leave a Comment

You must be logged in to leave comments. If you already have an SBA.gov account, Log In to leave your comment.

New users, Register for a new account and join the conversation today!