Small business financial controls have several pillars. One of the most important is efficient Accounts Receivable (AR) controls. This is an essential part of cash flow management. It has serious repercussions on the company’s sales and profits. Accounts Receivable controls must be embedded in every company’s financial management system. Continuous cash flow issues are a clear sign that Accounts Receivables are poorly managed.
Proper AR policies and procedures avoid placing your company in the precarious position of repeated cash flow crises. Many companies tend to focus on their sales and marketing and neglect their cash management components. These include AR and the associated credit policies, terms of payment, and collection procedures. There are seven steps to efficient small business financial controls focused on Accounts Receivable:
Before issuing credit, you must perform a thorough check of the ability to pay. Also, verify the past record of payments to other suppliers. Before opening an account, the seller should e-mail an application form. It contains the corporate name and address of the Buyer, the names of at least three suppliers, and the customer’s banking information. This information should then be verified through credit rating agencies such as CRISIL, ICRA or Dun & Bradstreet. You need to contact all the listed suppliers on the application form to verify their experience with the customer. After verification, it may be prudent to ask for a COD (cash-on-delivery) payment for the first purchase.
You must set clear payment terms. Stipulate the credit terms on all invoices and statements. The options for payments can be cash-on-delivery (COD), cash prepayment before delivery, and net 30-60 days. You can also offer 1-2% net 30 days. For export purposes, use a Letter of Credit where payment is secured by a bank or a documentary credit. The promise to pay at a later date is then supported by a bank. In general, the terms of payment depend on the creditworthiness of the Buyers.
Integrate invoices into the accounting software. Most advanced accounting software automates the invoicing process. It electronically tracks orders from purchasing to fulfillment. The software automatically produces reports that match purchase orders to invoices. This ensures timely issuance of invoices verified for possible omissions by your accountant.
Use Payment Options
Sellers must make it as easy as possible for Buyers to do business with them. Expedite payments by software that allows withdrawals to be made directly from the buyers’ bank account or credit card. Use secure payment intermediaries like Paypal, and Stripe. Make microtransactions through mobile apps on smartphones. Use both debit, and credit electronic payment processors. In this way, you can greatly improve the speed with which money can be moved. You can still pay the old-fashioned way – by cheque. This continues to be the prevalent form of payment in some industries like construction.
It may be well worth your while to invest in external accounting services for small business financial controls. There are many reputable companies that offer this service. Automate your accounting through state-of-the-art software. Investigate using services in remote locations with much lower human resource costs. Many companies in advanced economies have turned to offshore accounting firms. Offshore agents can facilitate AR collection and save you a lot of time and cost.
Collections As a Last Resort
Sometimes the best efforts and systems of Accounts Receivable management hit a snag. Even the most trusted accounts may start procrastinating on payments. This negatively impacts the cash flow of the seller. Collection policies and procedures are an integral part of efficient financial management. Carefully script collection calls by phone and e-mail to avoid confrontations and promote payment. This is best left to internal or external experts.
Limiting Payment Terms
Never permanently guarantee payment terms. Perform a regular evaluation of your customers’ payment records to see if they respect their payment terms. Credit is a privilege. Continuation demands proper respect. Weed out buyers with negative payment records early. Change payment terms to curb repeated abuse.