Small business accounting can be time-consuming, especially for entrepreneurs without an accounting background. Managing accounts payable and accounts receivable is an important skill to master. You need to be able to track what you owe a supplier, what you’ve sold and what your customer owes you, especially as your small business continues growing. Many small business owners turn to outsourced accounting services for some assistance.
Accounts Payable (what you owe) and Accounts Receivable (what you’re owed) are responsible for keeping track of money coming in and money going out of your business. Even if you do choose to outsource your business accounting, you will want to understand these accounts.
Managing AP and AR can be a bit of a juggling act. Staying on top of these accounts means the difference between properly tracking your purchases and potentially overpaying or not being paid for goods and services, which can highly disrupt cash flow if you are not paid on time. Since cash flow is the largest reason small businesses fail, tracking this is more important than ever.
Here are some general tips that can help small businesses stay on top of their receivables, minimizing the aging and, hopefully, ensuring a steady stream of cash into the business.
1.Establish Credit Policies
It can be extremely frustrating for small business owners when transactions take too long to close. Your small business must establish credit terms, which canary in accordance with the clientele you serve. Loyal customers with great credit ratings should be offered a greater flexibility period for payment, whereas a first-time customer should not be given that same amount of freedom. It is standard that most companies establish credit terms at 15 to 30 days.
Vice-Versa, you should pay suppliers as soon as the shipped goods arrive in good condition. If you do so, you might even be able to take advantage of discounts offered by suppliers who get their customers to pay earlier than usual.
If your small business has not set up any approach to the A/R process, here are some things to consider:
• Customer Track Records: Consider the customer and measure the risk accordingly.
• How Much Should You Credit? This really depends on your company. Deciding how much credit to give your customer is dependent on your history and the average transaction done by your company.
• Enforce the Policy: If you have a policy set out where customers have to be at a certain place financially, and you have a credit limit, don’t make exceptions. Stick to your policy.
2. Track Payments Diligently
It would be in your business’s best interest to create an A/R aging report which categorizes accounts receivable according to the length of time an invoice has been outstanding. Once this report is structured properly, you should quickly be able to see which accounts are current, past 15 days, past 30, 60, and so on.
3. Shorten Transaction Cycles
Long transaction cycles might be symptomatic of workflow bottlenecks or low cash-flow. This means you may be waiting to be paid for a sale before repaying a supplier. To avoid this, it’s essential to establish timelines for receivables and payables. Establishing shorter receivables timelines will help you quickly deal with your accounts payable. Small business owners should oversee someone to issue invoices, purchase orders, and other documentation quickly to clients. If your team designates days each month to generate a routine, you should successfully shorten your transaction cycles.
Outsourced accounting services can be of great assistance when it comes to invoicing. Your professional accountant can help get a system in place to ensure invoices are going out on time.
4. Be Proactive and Clear
Encouraging your customers to make timely payments can be tough. We advice sending friendly reminders via email or even phone soon after the invoice is sent out to the make sure your customer received it. Following up to make sure the customer has everything they need to make the payment can ensure the due date does not slip by. You should also make sure every invoice sent out is clear and is not missing important information that might cause your customers to avoid or delay paying it.
5. Use Automation to Keep Track
Tracking accounts receivables and accounts payable involves a lot of work. Your team will be responsible for creating invoices, issuing receipts, shipping orders to customers, reviewing purchase orders, maintaining financial statements and additional documentation. It can be a tedious process and if a single document slips, the process will have to be revisited.
Using accounts payable software is highly recommended to automate all transactions in real-time. The software can quickly compile all of the information needed for financial statements and can help track anomalies when delinquent accounts or interruptions in the workflow are included.
Accounts receivable and accounts payable are two critical indicators of capital flow and tend to be a huge indicator of the financial health of any company. Properly tracking and managing them is important to understand your financial situation and making better decisions for your business.
Additionally, outsourced accounting services can offer the proper accounting software to help ensure our business accounting is running smoothly. They already own the software, so you won’t have to purchase it yourself and can ensure it is properly maintained since they need the software for all their clients.
Managing A/R and timely cash collection is essential to keeping your small business financially healthy! Understanding and managing these accounts will benefit and steady your cash flow cycle. Without a steady cash flow cycle, your business is a huge risk of failing.
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You’ve earned the revenue, and we can help you collect the cash! Our accounting experts can assist your small business in accounts payable and receivable while monitoring your cash flow to ensure a healthy business. Let’s get started today!