The ability to close deals is vital for any startup. Converting sales into cash flow is equally essential, although most business owners will frequently underestimate it.
The swift and efficient collection of client payments is a fundamental aspect of startup accounting that every business owner should learn. It would help if you didn’t wait until you’re down to your last few dollars before contacting your clients about past due payments.
The most effective strategies for managing accounts receivable include those that proactively lessen the time and energy spent on collecting payments, hasten the conversion of sales into cash, and ensure excellent customer relationships.
This article will discuss appropriate accounts receivable management for startups and everything you should know.
Table of Contents
The Obligations of Finance Managers
The overall management of the accounts receivable investment is under the operational control of the finance manager. This individual needs to be actively engaged in:
- Control of the credit system.
- Helping formulate the business’s most effective credit policies at the highest levels of management.
- Approving credit applications based on established criteria.
- Hastening the rate of receivables conversion into cash by implementing a stringent collection procedure.
- Establishing an equilibrium between the cost of increased investment in accounts receivable and the extra profits generated by larger sales volumes.
Key Considerations in Accounts Receivable Management for Startups
Keeping accounts receivable from becoming unmanageable is a significant concern for new businesses. It can take time and effort to keep tabs on overdue client invoices across many accounts.
Delays in payments can burden cash flow, requiring business owners to take on debt-based funding to keep operations afloat, which is a major problem for startups, who rely on a lean but resilient structure.
The finance manager’s obligation in managing receivables will require careful attention to the following components.
The firm needs to think cautiously about how it will handle credit. Credit policy decisions will include lending criteria, payment arrangements, and debt collection strategies. The intent is to cover the collection period, cash discount, and other issues.
Credit policy will need you to develop a risk-return trade-off between the earnings on extra sales resulting from credit extension and the cost of bearing bad debt losses. Alternatively, the startup may weigh the economic benefit of investing in accounts receivables against the anticipated reward.
Typically, you can express credit periods in “net days.” For instance, if a firm’s credit terms are “net 30,” clients are required to remit their credit commitments within 30 days.
Furthermore, the cash discount policy specifies the rate of cash discount, the cash discount period, and the net payment period.
The credit terms might be “5/30 net 90,” for example. That implies that if a client pays in the first 30 days, he will receive a 5 percent discount; otherwise, he will have until the end of the 90-day grace period to pay.
Control Over Receivables
The finance manager is responsible for keeping tabs on the business’s debtors and deciding on an effective strategy for collecting past due payments. It entails both the formulation of credit collection procedures and their subsequent implementation.
The maintenance and management of receivables will incur the following expenses:
- A part of the company’s resources is in accounts receivable, so an infusion of cash will be necessary.
That will result in expenses in the form of interest on borrowed money or opportunity costs on own money.
- Administrative expenses consist of bookkeeping, credit monitoring, and much more.
- Collection expenses.
- Defaulting expenses.
Accounts Receivable Internal Audit
Best practices in accounting for new businesses have one thing in common. Positive routines will result from continual monitoring.
Allocate time every month to analyze your accounts receivable aging, a report presenting your accounts receivable based on how long a client has had an unpaid invoice. Do not just involve the accounting staff; engage sales managers or representatives who work directly with clients.
Finance Onboarding Letters for New Clients
Relationship building with the client’s financial contact is crucial. A “show me the money” demand for payment should probably not be your first email. A well-run company ought to ensure that such exchanges are rare.
Making payments simple will save your client from worrying about such issues and let them concentrate on running and growing their business. An onboarding letter for the finance department is a standard procedure in the early stages of a company’s accounting system.
Describe yourself and your preferred methods of contact in case of any problems, and express your eagerness to collaborate. Inquire whether the customer uses an online bill-pay service and if so, offer to sign them up immediately.
Fees for Overdue Invoices
Late payment penalties are nothing new for startups. Late fees can help ensure clients make timely payments, but they don’t guarantee that clients will pay off their bills early.
Because most startups send out invoices with payment terms of 30 days or more, they need to wait a minimum of one month to get paid.
If your startup intends to impose a late payment penalty, you must clearly state that fact on your invoices and advise clients of the policy before finalizing any sales. That will help to avoid potential legal issues in the future.
Down Payments on Orders
Startups can also use down payments on orders as a method of receivables management. Clients’ propensity to make timely payments may increase when they make a down payment for orders.
Whereas this practice is mainly for bulk purchases, more and more retailers are also applying it to smaller purchases. Nevertheless, a policy regarding down payment can be quite divisive.
The need for prepayment can discourage sales and, at the very least, repeat business. Individuals who view it as harsh may look elsewhere for what they need.
The Variables Influencing Credit Policy
A company’s credit policy is critical in establishing the amount and quality of its accounts receivables. A company’s credit policy can be either lenient or strict, depending on the situation.
A business with a lenient credit policy will give its clients extended payment terms and looser credit standards when purchasing things on credit.
Conversely, a company with a strict credit policy will only extend credit to a small group of clients, often those with strong financial backgrounds and proven credit histories.
Any rise in accounts receivables or an extra extension of trade credit to clients will lead to higher sales and the need for more finance to cover the greater investment in accounts receivables.
Additionally, there will be a rise in the costs of collection operations and the likelihood of bad debts. A firm’s investment in accounts receivables will depend on several variables, including:
- The impact of extending credit to clients on a business’s sales volume.
- The strategies and procedures used by the business to choose suitable credit clients.
- The clients’ payment patterns, tendencies, and routines.
- The business’s collection procedures and guidelines.
- The level of billing and record-keeping operational effectiveness.
- Additional expenses, including interest, collection fees, bad debts, etc. The rising tendency in such costs will reduce the extent of investments in receivables.
In the early stages of a business, establishing rapport with customers, closing sales, and delivering products take precedence.
Frequently, the business owner wears multiple hats and places billing and collections on the back burner in favor of gaining, satisfying, and keeping clients.
However, having a good cash flow is especially important for a new business that may not yet have established revenue streams. Entrepreneurs who can keep their cash flow steady and their debts under control have a better chance of seeing their enterprises thrive.
How Do You Identify a Troublesome Payer?
Selling on credit will help a business boost its quarterly sales and clear out stock. Customers, on the other hand, can have access to inventory while making payments at a later date, giving them more leeway in how they handle cash during their business cycles.
But how do you weed out troublesome clients for the good of your business? Remember that every business has several customers who repeatedly avoid paying their bills.
Some business owners are more forgiving of past irresponsibility and more willing to start anew because of the fear of losing clients.
Nevertheless, if a client consistently displays irrational behavior and fails to fulfill their payment commitments, you should terminate your relationship with them to make room for more reliable clients.
Cash flow management is a particularly challenging aspect of running a startup. Business capital must be managed carefully and sufficiently to meet operating costs without being stuck in accounts receivable.
It’s a sad fact that inadequate cash flow is a leading cause of startup failure. Thus, you must be proactive regarding cash flow to prevent it from becoming a tragedy.
Establishing criteria and developing a credit policy is not enough; it is also critical to control accounts receivable. Maintaining positive customer relationships should be a priority while reducing bad debt and keeping a tight rein on accounts receivable.
Hopefully, the article has answered all your startup accounts receivable management questions.