Accounts receivable is a crucial process for small businesses that involves sending invoices, tracking payments and due dates, and pursuing late payments. It requires keeping records of invoices and payments, generating aging reports to identify late invoices, and having a policy for following up on overdue invoices such as sending reminders and charging late fees. If invoices remain unpaid, businesses may write them off as bad debts or sell the invoices to a collection agency or to secure financing. Managing accounts receivable effectively through credit checks, payment agreements, and payment options can help maximize on-time payments and cash flow.

1. Ins and Outs of Accounts Receivable
for Small Business

2. You may call it bills receivable, or simply
invoicing. By any name, it’s crucial to the
success of your business to get paid the
money you’re owed on a timely basis. Here
are our top tips for effective accounts
receivable management.

3. Accounts Receivable Activities
Accounts receivable isn’t just a number, it’s a
process. It starts with sending invoices and
continues through recording payments as
they come in, keeping track of due dates,
pursuing late payments, and checking that
the payment matches the invoice.

4. Tracking Late Payments
First, you need to be aware when a payment
is late. Your accounting software should be
able to generate an aging report, which lists
past-due invoices in order from least to most
number of days since the due date.

5. Do this regularly, because the longer you wait
to pursue payment, the less likely it is that
you will ever get paid.

6. Encouraging On-Time Payments
Incentivize your customers to pay on time by
having a late fee policy, which you spell out
on the invoice (and in the service contract).
Another possibility is to offer discounts for
early payment.

7. Pursuing Overdue Invoices
Make an action plan for reminding customers
that their payment is late. Options include
sending a past due invoice, writing a letter,
emailing, or calling to speak to them in person.
You will also need a timeline: for example, send
a 2nd notice invoice at 1 week past due, email at
2 weeks, call at 3 weeks.

8. If that doesn’t work, you’ll need to move on
to stronger tactics, such as cutting them off
until payment is made, turning the matter
over to your lawyer, or selling the debt to a
collections agency.

9. Selling Your Invoices
Relieving yourself of a delinquent invoice
isn’t the only reason to sell your debt. You
can also sell current or slightly aged invoices
to get cash fast or use them to secure a loan;
this is called accounts receivable financing.

10. Finance companies will pay up to 90% of the
value of an invoice. But they won’t touch
really old invoices, so don’t expect to go this
route to get rid of bad debts.

11. Discuss the pros and cons of accounts
receivable financing with your accountant or
financial advisor.

12. Writing Off Bad Debts
If an invoice is 6 months or more past due
and you’ve made every effort to get
payment, face the fact that it probably will
never be paid. The next step is to write it off
as a bad debt in your accounting records.

13. You will need the record in order to claim a
tax refund if you’ve already paid tax on that
expected income.

14. More Strategies for a Good Accounts
Receivable Process
Maximize your chances of on-time payments
with these steps:
• Run a credit check before agreeing to supply
your goods or services to a business
• Get a signed agreement on payment terms
before starting work

15. • Get a personal guarantee which gives you the
right to sue the business owner personally –
rather than his/her business – for unpaid debts
(save this one for those with a bad credit record)
• Send your invoice immediately after work is
done

16. • Track the customer’s payment history with
you, and deal with those who are
consistently late payers (change payment
terms or stop doing business with them)

17. • Make it easy for customers to pay you with
options such as debit card, credit card, direct
debit, or automated clearing houses such as
PayPal and Stripe

18. As we’ve seen, your invoices are one of your
most valuable assets. And for small
businesses in particular, getting paid on time
provides that all important cash flow. Smart,
consistent accounts receivable can be your
golden key to surviving and thriving.