BOOST YOUR CASH FLOW:

6 PROVEN STRATEGIES TO IMPROVE AR FOR SMALL BUSINESSES

1.  Implement Clear Credit Policies & Processes with the Client:

  • Ensure that your contracts stipulate your expectations – deposit structures, late payments, etc.
  • Use contracts wherever possible.  Use T&M for extras/enhancements.
  • Set & Follow Deposit Terms: For project work, ensure your deposit structure helps you and includes a draw upon signing (10-30%), a draw upon commencement of project (30-40%), and depending upon the scope and length of the project, draws throughout the project.  At the end of the project, outstanding amounts should be less than 15% of the total value.   Your company cannot afford to be the “bank” for your clients!
  • Set Credit Limits: Establish credit limits based on the customer’s creditworthiness.  Place client on “service notice” until payment plan is agreed upon. For problematic clients, put their credit card on file and/or only accept COD (like a supplier/vendor would).
  • Payment Terms: Clearly define payment terms and speak to the client about your expectations for payment. (e.g., due upon completion, net 15, 30 days) and communicate them to customers.  (NOTE: for commercial projects, expect net 90 days)
  • Credit Checks: Conduct thorough credit checks before extending credit to new customers. For contractors, this is scary, and most will not request a credit check.  Yet, our own vendors require it of us.
  • Agree on email for extras/revisions along the way (paper trail)
  • Ensure great communication with the client throughout the project build
  • Complete the project with minimum defects/potential warranty…Do Good Work
  • Ensure that the project manager has seen the completed project before sending the final invoice for payment
  • Have the project manager meet the client and pick up the cheque in person.

2.  Streamline Invoicing Process:

  • Prompt Invoicing: Send invoices immediately after goods or services are delivered.  Learn to understand your client’s payment schedule as well.  For Maintenance & Snow Contracts, invoice on the 1st of the month (due within 30 days) and also ask about your clients AP schedule.  Invoice every week.
  • Detailed Invoices: Ensure invoices are accurate and detailed, including purchase order numbers, itemized charges, and due dates.
  • Electronic Invoicing: Use electronic invoicing to speed up the delivery process and reduce errors.  (If accepting credit cards, ensure you add a service charge.

3.  Offer Early Payment Incentives:

  • Discounts: Provide discounts for early payments, such as 2% off if paid within 10 days (2/10, net 30).
  • Rewards Programs: Create a rewards program for consistently prompt-paying customers.

4.  Enhance Collection Efforts:

  • Automated Reminders: Use automated systems to send payment reminders before and after the due date. 
  • Set up “Direct Debit Payment” – have the money that is owed ot you be automatically taken from the bank account of your client on the agreed date.  This works exceptionally well with Clients that are on Contracts. 
  • Follow-Up Schedule: Establish a consistent follow-up schedule for overdue accounts, including phone calls and emails.  Ensure that you have a policy, and that 1 person is responsible starting on day 31.  Attached here you can find a “best in class” AR Policy.
  • Personal Touch: Sometimes a personal call from a senior executive can prompt faster payment.

5.  Monitor and Analyze AR Aging Reports:

  • Regular Reviews: Conduct regular reviews of the AR aging reports to identify overdue accounts and address issues promptly.  Ensure that your managers are aware of which clients are falling behind.
  • Segmentation: Segment AR aging reports by customer type, industry, or other relevant criteria to identify trends and problematic areas.
  • Performance Metrics: Track key performance metrics like Average Days to Pay Invoices to measure and improve AR efficiency.   

6.  Leverage Technology and AR Management Tools:

  • Accounting Software: Utilize accounting software with AR management features to automate and streamline processes. QBO makes it easy to track.  But the key is not let the invoices get stale and uncollectable.
  • Payment Portals: Implement online payment portals to make it easier for customers to pay.

By implementing these strategies, small businesses can significantly improve their AR processes, leading to better cash flow and increased financial stability.

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