Starting a new business can challenge even the most seasoned of entrepreneurs. Maybe you're an idea person, with your finger on the pulse of the latest technology trends. Maybe you're a genius at raising capital to get a great idea off and running. What many startup business owners must do is "wear many hats". Every day you're taking another step out of your comfort zone. One of the most important hats an entrepreneur in a viable business will wear is accounts receivable. After all, revenue received will keep your business growing, keep profits rising and keep VC's interested.
Tracking Accounts Receivable
Accounts receivable, also referred to as A/R, refers to the income received from customers of your business. For a business to be profitable, in the simplest terms, your accounts receivable must be higher than your accounts payable, or what you spend to keep the business running. In a startup business, it is easy to get caught up in research and development or sales and overlook billing, especially if the operation is being run by one or a few people. The unfortunate fact is - the longer it takes you to send an invoice, the less likely that invoice will be paid. Keeping track of your accounts receivable is not only necessary for your bottom line but for the success of your business as well.
Here are a few reasons to stay on top of your accounts receivable:
- Understand cash flow - Running a startup business may mean that you're investing your own funds into the venture. Keeping tabs on your business cash flow will give you the information needed to one day separate your personal and business budgets, incomes and expenses.
- Appeal to venture capitalists - If your business has a solid cash flow, and proper bookkeeping, investors are more likely to consider interest in your company.
- Grow your business - Understanding your startup's finances will allow you to make important business decisions for growth. You will know the income potential, when to hire, who or what you can afford, and when to invest in other opportunities.
- Keep up with taxes - The last thing a small business needs is a large tax bill. Organizing your accounts receivable and expenses will allow you to make quarterly payments, if necessary, so that tax time isn't such a burden.
Best Practices for A/R & Collections
Accounts receivable may not be your favorite part of starting a new business but it should be a priority from day one. Here are some best practices for accounting and collections to help ensure your business' financial success:
- Document and follow a process - As with any other organizational tactic, an accounting process will help you stay on track. Consider which day of the week or month to create and send invoices. Add these reminders to a calendar so that it happens on a consistent basis. Remember to deposit and document payments as they come in.
- Communicate - Communication is essential with your customers or clients. Establish regular contact with their accounts payable person or department to ensure receipt of invoices and for questions about late or non-payments.
- Terms - The terms of payment should be included and agreed upon in a contract or agreement signed by your clients. You might consider special terms for early payment discounts or payment in full for larger orders.
- Automate - If it is possible to set up automatic invoicing through specific accounting software or automatic payments through ACH, credit or other means, by all means do it. Automating payments will help ensure payments are received regularly.
- Review receivables - As part of your accounting process, a regular review of your receivables will alert you to invoices that have not been paid. The sooner you can be aware of non-payment, the more likely you can recover the amount owed.
Part of accounts receivable is knowing when to send an account to collections. If you've established consistent communication with your customer's accounts payable department, you may be able to recover the funds on your own. For best results, here are some collections practices for startups.
- Set a collections policy - As part of your accounting process, you will need to determine an acceptable time period for accepting past due payments. Also to be determined:
- How you will follow up with past due accounts
- How often you will attempt to follow up
- How long you will attempt to contact for payment before sending the account to a collections agency
- Communicate - As part of your contract's payment terms, you will also need to inform clients of consequences if payments have not been received in a particular acceptable time period. When a payment is past due, you will need to communicate with your customers your expectations for payment and if you will receive partial payments. Escalate the account to collections quickly if:
- The customer is refusing to pay.
- The customer is no longer communicating with you.
- The customer repeatedly promises payment but payment is never received.
- Send to Collections - A good rule of thumb for sending an account to a collections agency is 90 - 120 days past due. Keep in mind, however, that the earlier the account is sent to collections, the more likely the funds can be recovered.
Focus on Your Business
As an entrepreneur, you don't start a business so you can do accounts receivable all day long. You want to focus on your business, sharing and selling your products and services, and keeping it growing with financial success. Making A/R a priority and following best practices is a positive step in getting your startup off on the right foot. Consider your options, including great relationships with your customer's accounting department, communicating often, and working with a collections partner with experience in your industry and working with startup companies.
Recognizing a specific need for B2B collections and business relationships, BYL Collections has launched a sister company, Enterprise Recovery. Enterprise Recovery works exclusively with business collections from other business clients. To learn more, click the yellow button.