Accounts Receivable - How to Improve Cash Flow and Reduce Bad Debts

I have worked with business owners for the past 36 years and one of the most challenging issues for every business is the collection of accounts receivable. In this article it is my intention to share with you some ideas that might dramatically improve cash flow and reduce those costly bad debts.

I believe it all starts with communications. I am recalling lightheartedly the scene in the movie Cool Hand Luke: “What we've got here is a failure to communicate.” Cool Hand Luke - Wikipedia, the free encyclopedia I remember when I first met my friend Shannon and we were cooking dinner together in her kitchen. She was explaining to me which towel was for drying hands and which towel was for drying dishes. She then explained what was recycled, what was composted and what very little went in the trash. In addition, she was always aware of my agreement with her. There was much more that we discussed, but I will not bore you here. The message that I want to convey is that I would not have known these procedures without her communicating them to me.

So it is the same with customer or client accounts receivable. Every business owner should communicate at the beginning of each relationship what is expected from the customer or client; the billing, payment and accounts receivable policies; and the promises of the business to the customer or client. I have found that as business owners, we are more worried about having the business than in getting paid. I believe this should be reversed and the first question that should be asked is how are we going to get paid and when. Every business should be paid promptly for the service they provide. In the end, it reduces the cost of doing business for everyone.

The communications should be as simple a providing each new customer or client with a copy of what is expected from the customer or client; the billing and accounts receivable policies; the promises of the business to the customer or client and obtaining agreement on everything. Agreement is the key. This should be handled before the relationship starts and as a very important part of every relationship. Existing customers and clients should also be communicated with and agreement reached.

So the beginning of the relationship with every customer or client is the key to increasing cash flow and reducing bad debts. The following are some additional ideas to consider and implement.

1. Communicate and obtain agreement with everyone in the organization concerning the policies for billing, collection and accounts receivable and make the communications periodically. Employee participation is important.
2. Make it easy for people to pay, including Paypal, credit cards and automatic withdrawal.
3. Keep communicating to everyone.
4. Make no exceptions in the process.
5. Have periodic meetings to assess the procedures and then change if necessary.
6. Set goals and standards for billing, collection and accounts receivable. These could be the following: Average collection period; # of days beyond month end when invoices complete; receivable turnover; and bad debts as a percent of sales.
7. Reward employees when goals are achieved .

Start today and implement these ideas. Success and decision are partners. The benefit will be improved cash flow, reduced bad debts and more profit for everyone to share.