Accounts receivable process –
Get paid on time and avoid cash flow problems
Running a business can be difficult, but there are many ways to make it easier. One of the most important is managing cash flow. This means issuing invoices on time and managing accounts receivable efficiently so your customers pay you when they should (not weeks or months later).
An Accounts Receivable Process is a system that tracks and manages invoices from customers. It can be set up to collect payments automatically, so you don’t have to worry about chasing down overdue invoices. This includes building an invoice, managing payments and ensuring that invoices are paid in full when due.
The goal of this process is to minimize the amount of time you spend on managing your accounts receivable. Here are the steps you can take to track your invoices from the moment they are created to when you cash them in.
Set up your customer’s payment terms
Your Accounts Receivable Process starts with setting up your customer’s payment terms. This includes when you bill them, how often they pay (weekly, monthly) and what the due date is for paying their invoice in full. Make sure you discuss these details before doing any work on projects or offering services to customers – it will help avoid misunderstandings.
Offering a discount to incentivize customers to pay early can be helpful. They’ll appreciate the offer and will likely take you up on it because they can reinvest their savings.
You can also add a late payment fee to the invoice if you choose, to encourage prompt payment.
Make sure you update your Terms of Sale with these details before doing any work on projects or offering services to customers, so there are no misunderstandings later.
What should be on a tax invoice?
Accounting software such as Xero has a number of features that help with the process. One thing you can do is create templates for each customer type, so they’re all ready to go when it comes time to send out an invoice.
The required components of an invoice are explained here from ATO.
The invoice should be as accurate and detailed as possible to avoid any confusion or discrepancies. Be sure that the right contact information is listed, including name, email address, phone number, ABN, your banking details (most small business owners missed this) and anything else pertinent for them to know.
Adding comments on your invoices also helps. For example, if you need to make a payment within 14-days and there are no other terms stipulated in the contract, specify this on the invoice with an asterisk (*) next to it. Or indicate pay late fees or penalty interest rates to encourage payments on time.
Send invoice as soon as possible and make sure it is accurate
What’s the best time to send an invoice? It’s crucial to get the timing and details right- sending invoices too late can affect cash flow.
Time is of the essence when it comes to getting paid on time- send your invoice as soon as possible! Send it to them via post (not preferred), email or via online invoicing in your accounting software.
For example, Xero makes it really easy to create and send online invoices from your phone or desktop. You can customise the invoice by adding your company logo, or by including a message to prompt payment. Set automatic reminders to follow up with the customer if payment is overdue without you personally contacting them yet. This is an excellent time-saving feature.
Payment options for small business
There are many different payment options available for small businesses. Which option is best? That depends on your preferences and the needs of your business. However, there are a few types to get you started in considering how payments can be processed with ease – which will also help when it comes time to collecting accounts receivable!
Cash and Cheque
Cash is a popular payment option among small business owners because it’s easy to access – just collect the cash and deposit it into your bank account. But, what happens if you lose or misplace that money? It can be difficult to track down the right person who owes you the cash. Similarly, with cheques, you’re required to make a bank deposit, which can take time. The time when the customer writes a cheque and post it to you and you banking it, can take days.
With electronic payments, you have more control over your cash flow because payment is made electronically and the funds clear in real-time – typically within a few hours!
Xero has a great time-saving feature called bank feeds. This is a feature that connects your bank to Xero and automatically downloads transactions into the account to reconcile the invoices with a click of a button. In the past accounting software require manual data entry or importing bank transactions.
How do you track accounts receivable? It’s essential to monitor what your customers owed you, when they paid and how much was owed on a monthly basis. You can generate an A/R report to display invoice metrics such as the total invoices outstanding for each customer or the overdue status of individual invoices.
Xero’s Sales Reports allow you to drill down into your data in many different ways.
Create a report in Xero by going to Reports > Sales. From here you can select the metrics and invoices that suit your needs, for example, Aged Receivable Detail includes unpaid invoices and overdue status of the individual customer. You will have an overview of all your outstanding invoices. This gives you an early opportunity to act on them quickly to minimise bad debts.
The importance of establishing a strong Accounts Receivable process cannot be understated. It not only helps you stay on top of your cash flow but also ensures that the money coming in is collected and processed accurately. If you are too busy to take on this task yourself, let Onbookkeeping do it for you! Our team can manage all aspects of accounts receivables so that you don’t have to worry about them.
Just give us a call or fill out our contact form today to see how we can help your business succeed with its finances. Which other tasks would make life easier?