Accounts receivable are the payments that customers owe small companies for their previous credit purchases. It represents the lines of credit that corporate enterprises are willing to extend to them when they cannot pay in cash.The corporations then record account receivable as a current asset in their annualbalance sheet.Account receivable management refers to these companies’ processes to ensure all of their customers pay their outstanding dues on time. It prevents the companies from experiencing severe financial difficulties due to cash flow issues and the occurrence of bad debts. Only then can the companies maintain their profitability and liquidity position.
Kavan Choksi is a businessman with interest in business finance, modern technologies, and photography. According to him, the entrepreneurs operating small companies strive to sell their brand products to their prospective customers at competitive prices. It allows them to generate maximum sale revenue and after-tax profits to outperform their competitors in the market. However, many of these entrepreneurs often lose money when their slow-paying customers do not clear their outstanding dues on time. As a consequence, their companies experience severe cashflow issuesthat often lead to bankruptcy.To avoid such an adverse scenario, they need to devise and implement a proper accounts receivable management policy for their companies.
What should a good accounts receivable management policy include?
Entrepreneurs of small companies should ensure the accounts receivable management policy they formulate for their businesses includes:
- Assessing the creditworthiness of potential customers before extending them lines of credit,
- Scanning and re-evaluating all existing customers for probable credit risks on a regular basis,
- Maintaining cordial customer relationships and adopting a zero-tolerance policy on late payments,
- Identifying and informing slow-paying customers of their overdue payments on a timely basis,
- Imposing penalties on slow-paying customers who continue to maintain outstanding their debts,
- Taking legal action against slow-paying customers who blatantly refuse to clear their dues,
- Minimizing the outstanding debtor balance, and
- Preventing the occurrence of write-offs on the customers’ credit.
Tips to improving accounts receivable collection
The accounts receivable management policy that small companies establish for their businesses should achieve two primary objectives. These are to boost cash collections from customers and prevent the occurrence of bad debts. The corporations can fulfill these goals by implementing the following tips:
- Maintain an accounts receivable aging statement to assess their customers’ payment status,
- Be proactive in streamlining invoicing and cash collection efforts,
- Identify customers having past-due receivables and take a proactive approach on collecting them,
- Consider introducing early-payment discounts to encourage customers to pay their dues on time,
- Be open to accepting online paymentsfrom customers who cannot clear their dues in cash,and
- Ensure the terms of payments and penalties applicable on all customer invoices.
According to Kavan Choksi,companies need to adopt a suitable accounts receivable management policy to strengthen their cash flow. Then, the corporations will have adequate funds to run business operations make purchases and investments. It even improves the cordial relationship they maintain with their customers, enhancing the companies’ market image.