Complete Guide to Accounts Receivable for Small Business

Published on January 30, 2024

Businesses of most sizes need effective accounts receivable (A/R) processes, and small businesses, which typically need more surplus funds or budgetary flexibility of their larger counterparts, are no exception. In particular, small businesses need to pay closer attention to how efficiently and effectively they collect their outstanding debts.

In this guide, we’ll examine accounts receivable in more detail, why it is so critical for small businesses to get it right, and some standard best practices for its management.

What is accounts receivable, and how does it work?

Accounts receivable is an accounting term that focuses on the portions of your corporate balance sheet and general ledger — along with any associated records, processes, and activities — that relate to money owed to your business. Typically, these contractually obligated funds reflect payments due from your customers that cover credit-based purchases.

The average A/R timeline may look something like this:

  1. Your customer orders a good or service from your business, which you subsequently deliver before payment.
  2. You provide the customer with an invoice identifying how much is owed and when it is due.
  3. You wait for payment, routinely sending reminders to your customer regarding the upcoming due date.
  4. If paid, you close the record.
  5. If unpaid, you pursue various collection actions to recover the funds.

Accounts receivable vs. accounts payable 

Accounts receivable and accounts payable (A/P) are two sides of the same coin. While A/R focuses on the money owed to your business for purchases made by your customers, A/P focuses on the money your business owes to suppliers and vendors for the purchases that you’ve made. If you’d like to explore the difference between A/P and A/R further, check out our article Accounts Payable vs Accounts Receivable.

Why is accounts receivable important for small businesses?

Unless you operate under a cash-on-delivery model — common among retailers and the food service industry — the primary source of income your business receives will likely come from paid invoices. Any delays, inaccuracies, or other challenges that affect these payments can dramatically impact your overall income and cash flow — particularly for more modestly-sized organizations.

Rather than collecting thousands of invoices monthly, many small businesses rely on a handful to a few dozen monthly sales to keep the lights on. This reality means that each individual invoice represents a much larger portion of overall income. So any corresponding issues with a given sale will represent a proportionally more substantial hit to your bottom line and may potentially alienate a noticeable percentage of your total customer base.

Conversely, when A/R is running smoothly and you have greater cash in hand, you can more flexibly respond to unexpected market opportunities, supply chain interruptions, growth plans, or any of the various conditions that might influence your bottom line.

How to manage accounts receivable as a small business 

To keep your income moving smoothly, you need effective accounts receivable management. After all, if you never send out an invoice, your chances of getting paid for your work plummet considerably, and the longer you delay sending out your payment requests, the less likely they will be responded to promptly. 

Well-documented, consistent processes like those outlined below can help your business avoid common mistakes or unnecessary delays that artificially inflate your payment timelines and potentially annoy customers. 

1. Establish clear credit policies

The terms of a sale should never be a surprise. Before a delivery or cash changes hands, you must establish a clear set of rules regarding how and to whom you offer credit. Admittedly, you’ll want some general policies in place, but you’d be wise to cater these broad guidelines into more specific agreements depending on the individual buyer. For instance, you may offer a larger credit line to a long-term client who has always paid promptly. Or you might offer a shorter due date to a new business that hasn’t yet built up a reputation.

Either way, you want to ensure that your customers know what is expected from them before either of you agree to a sale. You should also document these agreed-upon conditions on any invoice you send.

2. Communicate early and often

Your A/R policies will directly impact your customer relationships, so keep the lines of communication open. When your clients know what is expected of them at each stage of the sales cycle and what pricing and credit terms will appear on a given invoice in advance, they are less likely to challenge the owed amount.

At the same time, your invoices should be thorough and accurate, including all of the necessary information to confirm the delivery and how to pay it. Typically, these records should include:

  • An invoice number
  • Business and contact details for both you and your customer
  • A delivery summary that includes date and pricing information
  • Credit terms, along with the related due date
  • Instructions on how to pay

To ensure that these critical messages — particularly invoices — are being received, follow up with your customers via direct channels — such as a phone call or email. You should also prioritize sending out your invoices as close to the time of sale as possible to accelerate the start of the payment cycle. And employ consistent, multi-channel dunning processes to keep that outstanding payment ahead of your customer’s mind.

3. Streamline your operations

Establish centralized workflows to standardize A/R processes across the business. With uniform operations in place, fewer outstanding invoices will be able to slip through the cracks. And you should regularly reevaluate these workflows, looking for bottlenecks or other causes for delay. 

For each process step, clearly define who is responsible for any task. Small businesses will likely need to set up a dedicated backup for each activity to cover for absences, planned or otherwise.

4. Document everything

As mentioned, your A/R appears on your general ledger and balance sheet, a critical component of your bookkeeping. As such, details regarding any transaction should be well documented, tracking the entire sales process from the initial order to the final payment. These records should be kept readily available in case any payment disputes, collection efforts, legal actions, or audits arise.

Not only will thorough recordkeeping help protect your small business, it will also help drive process efficiencies. In particular, as part of your documentation efforts, you should track and report on various key metrics — such as days sales outstanding (DSO), average days delinquent (ADD), or accounts receivable turnover — that gauge the overall performance, timeliness and efficiency of your A/R processes. Armed with these facts, you can better identify process abnormalities, potential fraud, and performance slowdowns.

5. Use accounting software

Your accounts receivable processes will generally include many time-consuming, repetitive tasks that can quickly bore even the most dedicated employees. However, with the right solution in place — such as our Accounts Receivable Automation software — you can offload these more mundane tasks to the technology, freeing up your staff for other efforts.

At the same time, these tools can simplify the scaling challenge as your business grows, allowing you to manage increased transactions without hiring additional staff. If the platform you choose offers extensive integration capabilities, you can transfer sales and invoice data directly between systems, avoiding potential transcription errors and associated processing delays.

How much can you save with A/R automation?

Learn how A/R automation saves time and reduces cost for business.

6. Make it easy to pay you

Your customers should be able to give you their money quickly, so make your payment processes as straightforward and intuitive as possible. As mentioned, you’d be wise to include payment instructions on any invoice you send. If possible, consider supporting as many payment formats as feasible — a move that will expand your potential customer pool.

You can further simplify the process by deploying a dedicated portal that allows buyers to manage their outstanding invoices and corresponding payment details directly.

Challenges in A/R management 

Of course, no matter how rigorous your planning is or how comprehensive your accounting platform is, there will be problems. Any arising issues should be addressed promptly to avoid potential payment delays or relational fallout.

Fortunately, there are some proactive actions that you can take for the more common challenges, such as:

  • Bad debt: Any time you extend credit, you’re risking the chance that you’ll never get that money back. However, by researching the financials and credit history of those buying from you, you can better identify those customers who might be short on cash or credit risk ahead of time.
  • Forgotten reminders: Your dunning efforts can make all the difference in collecting your outstanding debts, so you should prioritize ensuring that these messages are being sent out consistently by deploying relevant software or dedicating specific staff.
  • Invoice errors: No one wants to see a mistake on their bill, but by shifting away from manual tasks to automated software, you can boost the accuracy and reliability of your invoicing and A/R efforts.
  • Late payments: Rather than hoping that your customers will be prompt in their payment, offer them incentives to act quickly, such as discounts or waived delivery fees.
  • Transaction disputes: Ideally, your collected documentation will help resolve any challenges to a submitted invoice. But if the error is on your part, you should promptly identify and resolve the source before other transactions or customers are affected.

Accounts receivable software for small business

You don’t have time or money to waste as a small business. Every dollar you spend every hour your employees work has to matter. So, while opportunities to improve the efficiency of your operations can be tempting, you need to prioritize those investments and innovations that will give you the greatest return on your investment.

One of the best things you can do for your A/R processes, invoicing efforts, and bottom line is to employ automation software. That’s because:

  • The right platform will let you eliminate the busy work of collections, relying more on the “mindpower” than the manpower of your staff. 
  • With the software doing the routine work, you can instead focus workers on managing customer relationships or other more profitable endeavors. 
  • Automated platforms can readily accommodate business growth without increased headcount.
  • Centralized process workflows will help standardize operations and eliminate unnecessary delays from your A/R timelines. 
  • The common framework will also help to reduce the potential for fraud and simplify reporting and tracking efforts.

Invoiced: Making Accounts Receivable Automation Easy 

Of course, not all accounting platforms are made equal. Invoiced’s Accounts Receivable Automation software simplifies switching from manual, paper-based invoicing processes to a comprehensive e-invoicing platform that makes sending, processing, and closing invoices a breeze, and our integrated payment portal will streamline the purchase process for all of your customers.

Our robust platform offers customizable automated workflows and can integrate with a broad array of business applications, making it easy to transfer accurate, timely information. Meanwhile, our Smart Chasing technology can help ensure customers are constantly contacted via email, letter, phone, and more regarding their upcoming payment.  

Schedule a demo with one of our accounting professionals today to learn more.

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Published on January 30, 2024

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