Managing Accounts Receivable and Accounts Payable in Modern Business

Numerous entrepreneurs aren’t economists. They’re simply ingenious or ambitious people who have creative business ideas and want to put them to practice in an organized way.

However, they might lack knowledge of some professional financial terms. If they want to communicate with their clients and business associates on an equal footing, they need to master these phrases. It’s vital that business owners become versed with financial concepts.

Therefore, we’ve prepared a thorough analysis of two major cash concepts that every single business owner needs to know – accounts receivable and accounts payable.

Apart from learning the ABCs of cash flow via these two operations, you’ll also have a chance to learn more about various strategies for keeping these two aspects of your business in order.

They’re the crucial prerequisite for seamless business growth, too. So, take some time to expand your knowledge of accounts payable and accounts receivable, as well as other business fetatures, closely related to them.

Accounts receivable = Assets you need to charge

In simple terms, accounts receivable are all the payments that other business entities are obliged to pay to your business for purchased services or goods.

For instance, let’s say you run business in the field of construction materials. Your products will be bought by various construction companies. The invoices you issue to those clients are accounts receivable.

You’ve sold some goods that you expect to be paid for. Since those payments make the income side of your balance sheet, they’re considered your assets. If your clients are honest and reliable business partners, they’ll pay their obligations on time.

Being paid on time is the crucial aspect of every successful business. Due to that, you mustn’t have a weak spot for late payers. On the contrary, business owners should bring a set of clear rules for dealing with such clients. Read more about it later in the text.

Accounts payable = Liabilities you need to pay

As opposed to accounts receivables, accounts payable encompass all the debts that your business has to pay to other businesses.

Let’s get back to the construction materials business from the previous paragraph. Running such a business means that you buy materials from other businesses, as well.

Accounts payable include every single brick or plank you transport to your stock. The moment your business receives an invoice from another business, it becomes your liability.

Here comes a potential problem if you don’t cover your debts on time. Nowadays, you can never tell when your business might need to take a loan or make any other deal with a bank.

Not paying your debts in accordance with the agreed due dates will affect your business credit score. As a result, your business will be treated as an unreliable entity. This might disqualify you from reaching a financial agreement with a bank or any other financial institution.

Furthermore, failing to pay your obligations within deadlines will put your own business at risk, as well. So, it’s clear that sorting out accounts payable immediately as they arrive is a must.

But what can you do to make ends meet and manage your obligations as soon as possible?

Ask for special conditions in advance

When you’re in the role of a payer, you should try to negotiate some flexible terms for your business. In line with that, talk to your vendors and ensure some special conditions in advance.

Nevertheless, be aware that you need to prepare something to offer them in return. For instance, if you want to order a large number of items from the same vendor, asking them to pay them in several installments would be a smart move.

On the one hand, you will be paying them as those goods are being sold. That would keep more cash for everyday business errands in your pocket. On the other, the vendor will also profit from that deal. They will be getting assets over a certain period of time, which will provide them with a constant inflow of cash.

Additionally, it’s highly probable that you will order the same products from them again if you manage to place them on the market.

It’s also wise to contact your supplier if you anticipate that you won’t be able to pay them on time. As your accounts payable will depend on numerous factors, sometimes you just won’t manage to set a budget that covers all your expenses.

If such an inconvenience happens to you, don’t even think about ignoring your vendor. Instead of eluding your payment, inform the vendor in advance about your difficulties.

We all know what it looks like to find yourself in the middle of a financial struggle.

Therefore, taking an assertive attitude and addressing your supplier about your late payment is the best thing you can do.

Offer unique payment terms

The key goal of every business is to keep a steady cash flow, both on the receiving and spending ends. In addition to certain financial skills, you also need to have a knack for proper communication with customers.

Therefore, if you want to achieve a high rate of successfully collected accounts receivable, implement the following tactics in your work:

  • Various payment methods for international clients – Working with global businesses is a great opportunity for your venture. Hence, let them choose how they’ll transfer their money to your account. From 2Checkout and Stripe and similar payment solutions to payments via Internet cards and Western Union, you can provide your customers with a wide range of options. The more options they have, the better.
  • Reasonable payment deadlines – Modern business deals are closed and executed in short periods of time and money flows quickly these days. Even if it’s a longer project, milestones are set at that pace. Long payment deadlines will affect your liquidity. Therefore, limit your customers to a three-week payment period. However, you might think about extending this deadline for your long-term or VIP clients.
  • Discounts for fast payers – Motivate your customers to make their payments as soon as possible by introducing discounts for fast payers. For instance, make several categories of early payers and determine how big discounts they’ll get for such payments.
  • Fees for late clients – Inform your clients that you’ll have to charge them extra fees if they miss the deadlines. However, make sure that this note is explicitly mentioned somewhere during the negotiations or even in the estimate (when working on a project). Finally, don’t forget to add this note to your invoices, as well. This three-tier reminder should nudge them to pay you on time.

Enhance the collection process

While debt collection is essential for every business eager to thrive, this aspect of your managerial style deserves special attention.

When you read the previous paragraph or just recollect some of your past experiences, you’ll see that failing to pay your obligations is sometimes vis major. Thus, business owners should abandon negative thinking and leave the notion that anybody would trick them on purpose.

Instead of that, assume that late payers are having some sort of business trouble that prevents them from covering their debts towards your business. Because of that, the most efficient decision you can make is bring a meticulous plan on collecting your accounts receivables. It should gradually move from mild and flexible solutions to stricter and harsher ones.

  • Sending a note in advance – The most efficient way to reduce the number of late accounts receivable in advance is to remind your partners and customers about their due payments. This proactive approach will yield two-fold benefits. For starters, the other side will have enough time to prepare assets and make the payment on time. Also, you’ll establish a closer connection with your partners, which will incentivize them to sort out their accounts payable on time. What’s more, this option can be performed automatically in most cutting-edge invoicing tools such as Invoicebus.
  • Show tolerance – Set a grace period for your debtors to let them pay you without sending any official reminders. For instance, you could tolerate a five-day payment delay. However, anything beyond that requires a course of determined actions. If the same client repeatedly misses the deadline in regular intervals, reach out to them to check if their invoice dates are correct.
  • Polite official reminder – A client who has ignored two previous ultrasensitive features demands a harsher reaction. Hence, send them an official reminder. You should sound neither aggressive nor impatient. Send them a polite template reminder about their debts towards your business. Give them a new deadline (seven days will do) and attach the invoice to that letter.
  • Serious legal warning – Customers who turn a deaf ear to all your requests require a different communication manner. Since they don’t show understanding for your situation, you should treat them the same way. So, take the plunge and warn them that you’ll have to take a legal action against them unless they make their payments. Sending this kind of letter of demand is the last step before you start a legal procedure. However, don’t send this final warning before you’re completely sure that you’re ready to sort out that case in court.

All the notes you send to your debtors will make a financial record. In return, it will be an important piece of evidence in case you have to seek justice in front of legal institutions.

How to spot a problematic payer?

There are numerous legal mechanisms that will protect you and help you get back what’s yours.

Still, this process can turn into a long-lasting hassle. No business owner has time and assets to bother with such things.

In order to avoid this tiresome procedure, you should invest more energy in anticipation and research before you start working with a partner. Luckily, we live in a time when every single bit (and byte) of information is available at the click of a mouse.

Therefore, you should conduct a thorough analysis of your potential business partners beforehand. At first, it might seem like a strenuous task. Even so, it will save you all the trouble that collaborating with late or never-payers might cause.

So, in order to minimize aggravation when dealing your accounts receivable, cover the following points:

  • Social media and online check – When you get in touch with a customer, check their Facebook business page, LinkedIn profile and other professional accounts. That way you’ll gather more information on their habits and lifestyles. Also, check their business status. For instance, in the USA, you can visit the U.S. Securities and Exchange Commission website to learn more company filings. Find out if your country has a similar register. It will help you get the gist of your potential partner’s business policy.
  • Customers’ and providers’ reviews – You can get a lot of information from other people’s reviews. Since freelancers are among the most endangered businesspeople, payment-wise, they should double-check every potential client. In line with that, freelance websites can serve a great purpose, because you can get an instant insight into everybody’s portfolios and feedback on those platforms.
  • Farewell repeat eluders – You should bear in mind the saying “Once bitten, twice shy” when it comes to repeat eluders of financial obligations. Many business owners don’t like leaving their customers and some entrepreneurs are inclined to forgive irresponsible behavior and turn over a new leaf. However, if the same client keeps showing the same irrational attitude and doesn’t meet your agreements pertaining to payments, you should simply stop working with them and free some time and space for more trustworthy customers.

The business market dictates numerous rules that need to be met in order to make your business thrive. Because of that, you should obey these principles and adjust your professional effort to outside conditions.

However, you’ll still have a wide range of features inside your business that require continuous work.

What keeps every business alive is a positive ratio between accounts receivable and accounts payable. Businesspeople who manage to maintain a regular inflow of earned assets and proper handling of their obligations are more likely to reach their business goals.

Therefore, we hope this guide will help you build firm financial foundations and get ahead of the curve in your field of work.

Mark Thomasson
Mark is a biz-dev hero at Invoicebus - a simple invoicing service that gets your invoices paid faster. He passionately blogs on topics that help small biz owners succeed in their business. He is also a lifelong learner who practices mindfulness and enjoys long walks in nature more than anything else.
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