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