Many small businesses struggle with late payments, leading to financial strain and insecurity. If you add to the equation a lack of a reliable system for collecting payments, you're setting yourself up for failure.
Managing account receivables is essential for maintaining healthy cash flow and effective small business financial planning. Still, the good news is that you don't have to be a financial expert to do it.
We've created this guide to simplify account receivable management in just three simple steps everyone can follow. Plus, we’ve included a handy cheat sheet to ensure you’re always on top of your AR game.
Accounts receivable represents the money a business is waiting to get from its customers. It usually happens when the company has delivered a product or service but hasn’t received the payment yet.
Think of accounts receivable as a kind of short-term loan the business has given to its customers, where the customers are expected to pay back within a set time frame for the goods supplied or services rendered by a company.
Companies list accounts receivable as assets on one of their small business financial statements, their balance sheet to be precise, because they expect their customers to pay them. Since the customers legally owe the money, the company considers it as something they’re likely to collect.
To understand accounts receivable better, here are some examples:
On the other hand, the opposite of accounts receivable is accounts payable.
Accounts payable refers to when a company owes money to its suppliers or someone else.
Tracking your account receivables is a crucial part of responsibly managing business finances. They're an essential part of financial analysis that helps investors assess a company's financial health and actual value.
Since accounts receivable are considered a current asset, they show how well a company can meet short-term financial needs without needing extra cash.
Investors often look at how quickly a company collects these receivables, which is a metric known as the accounts receivable turnover ratio, to gauge the company's efficiency and the reliability of its customers.
Additionally, investors and accountants sometimes examine the days sales outstanding (DSO), a metric that shows the average time it takes for the company to collect payments after a sale.
Click here to learn more about what investors really want from early-stage startup finances.
Otherwise, keep reading to find out how to manage account receivables in three easy-to-follow steps.
The first step in the accounts receivable process should be analyzing where you currently stand in terms of customer payments. If you want to speed up the process, we suggest using one of the best financial analysis software.
There are three things you should track to calculate your average accounts receivable:
Categorizing overdue payments helps you keep track of which customers are late and by how long. This way, you can focus on the most critical overdue accounts first and take steps to get the money you’re owed.
You should categorize them by number of days, for example, less than ten days, between ten and 30 days, over 60 days etc. You should track these late payments weekly or monthly.
The next step is all about creating the procedures to automate your payment and develop an action flow for sending reminders to your clients.
The goal of automating payments is to track all your active customers and their payments easily and to get alerts when something needs your attention.
A reliable tool can help you automate the process, save a lot of time and reduce errors. Here are some tips that will help you find the best financial reporting software for you:
Creating an action flow is essential for those who want to grow and scale their businesses while keeping finances in check.
It's all about setting up automatic processes for handling tasks like customer follow-ups and reminders, so you can avoid running into debt or losing money as you grow (it happens more often than you think).
For example, you can send an automated reminder 1-7 days before the due date.
If a customer doesn't pay on time, you can send one or more automated reminders afterwards, but you also have to be prepared for those situations when a customer might ignore them.
In that case, you may consider putting their credit on hold or even handing off the case to a legal team or debt collection agency, if more than 90 days have passed and the client hasn't reached out to you.
Of course, you can customize the action flow to fit your specific business needs and requirements.
Finally, the entire process should be divided among people who are assigned specific responsibilities, depending on the size of your company and the length of your sales cycle. Some of those responsible for different phases of the process could be:
Make sure that everyone understands their role and responsibilities and that it's clear who is accountable for which part of the process.
Don't worry, you don't have to be a financial expert to take care of your accounts receivable balance. Our cheat sheet provides you with all the essential information, making it easy to look up key details quickly whenever you need them. Get access to all the key terms, useful metrics and practical tips in one place.
Fuelfinance helps you automate and simplify tracking your accounts receivable and overall cash flow.
Our clear, all-in-one dashboard lets you track all key SaaS metrics in one place and import data from Quickbooks. Having a clear overview of your finances helps you spot cash flow problems early on before they grow big.
If you're not sure what metrics you have to track, our tool suggests the most important KPIs for you, based on your startup financial model.
Fuelfinance is also a financial modeling software that specializes in financial forecasting for startups and small businesses. It helps you create financial models for the future, providing you with both optimistic and conservative scenarios, so you can prepare for all possible outcomes and prevent unexpected budget issues.
Here's what else you'll get:
And if you're just starting out and haven't secured funding yet, we have something that can help. Try our new free Bootstrap program, a tool designed to manage your business finances and create impressive reports for investors.
Here's what you can do for free:
Starting a business has its challenges, and we, at Fuelfinance, get that. That’s why we’ve created user-friendly financial software designed specifically for small businesses and startup founders. Our tool makes managing your finances simple, even if you're not a finance expert.
Fuelfinance helps keep your financial records organized and calculates important metrics, like comparing your budget to actual results. This shows you how well your business is doing. It also helps with recognizing revenue and preparing financial statements.
Plus, we offer cheat sheets to make understanding your finances easier and assist with managing accounts receivable. You’ll also get continuous support from our expert team, ready to answer any financial questions you have.
Curious to discover how Fuelfinance can transform your financial management?
Book a demo today to see how we can help you.
Accounts receivable is the money that customers owe to a company for products or services they've already gotten but haven't paid for yet. Tracking your account receivables is important because it helps the company keep track of how much money they are waiting to receive and manage their cash flow accordingly.
To illustrate this, think of an electric company that sends out bills at the end of the month, after customers have used electricity. The company records the money owed as accounts receivable while it waits for customers to pay their bills.
The company's accounts receivable include any money customers owe for goods or services they've already received but haven't paid for yet, including outstanding invoices, credit sales, service contracts and loans to customers.
Accounts receivables are listed as an asset on a company's balance sheet. It’s considered a current asset because it represents money the company expects to receive soon. On the other hand, accounts payable are considered a liability as they represent short-term debts or the money that your company has to pay to someone else.
