How to achieve a (close to) 100% accounts receivable collections rate

If you follow any Fractional CFO on social media, you've most likely seen posts around cash flow and open accounts receivable. Accounts receivable is what your business thrives on and is what ensures that your company is healthy, solvent, and able to grow. While there are many solutions to preserve cash flow, ensuring you have a high collections rate is what every investor, lender, and possibly strategic client will review to assess whether they will enter into a relationship with you.

Here's how you can ensure that your collections rate is as close to 100% as possible.

Advance payments

The most obvious is payment in advance. Advance payments can take the form of a full down payment for all of the services provided or a partial payment.

A full prepayment is appropriate where there is a small amount of work to do or a subscription based model. It is very common to charge recurring services on the first of the month, and deliver services throughout the month. Many bookkeepers and software companies operate this way.

Partial prepayments are common and appropriate in larger contracts. They are especially common in construction contracts and large fixed asset purchases. Having your clients pay you in advance to order equipment or ensure you can make the first few months' payroll and payments is important to ensure the continuity of the contract and the ability to deliver.

Auto-charging

Having a customer's payment method on file with you is another great way to ensure that you always receive your payments. Payment methods can include credit cards and auto-debit ACH. Today, there are many websites which allow you to auto-charge your customers. Stripe is very popular and is very easy to setup. QuickBooks online also has some services in this area. If your quantities are large enough, your bank may have services as well.

Auto-charging allows you to be in control of when payments are submitted to you and ensure that your cash flow is healthy. You can set up payments to automatically charge your clients each month, week, or quarter. Especially where charges are the same, having this setup ensures that you're trying to collect.

The downside of this method is that sometimes payments fail. That creates and open account receivable and a requirement for your client to pay and provide an alternate payment method. You must ensure that you're reviewing payments each month.

Be aware that auto-charging may come with transaction fees. You should either ensure your pricing includes these or you may charge a transaction fee.

Digital payments

Your clients often want to pay you, but if it isn't easy for them, oftentimes it won't happen timely. By using a good invoicing software such as Bill.com, QuickBooks Online, or even Stripe. This ensures they can enter their own payment details and you'll receive your money as soon as possible.

As with auto-charging, these services often come with additional fees which you can choose to pass to your client. You will need to ensure that you're on top of your collections, otherwise, you'll fall into a situation where you have large accounts receivable balances.

Implementing accounts receivable

Having large accounts receivable can cause problems, and how you choose to collect is up to you. By implementing good accounts receivalbe systems and processes you'll ensure that your collection rates stay high and your business is cash positive.

Remember, that these systems come with cost, so do ensure that you calculate include these costs in your expenses and ensure that they are worthwhile to use.

Agile Accounting Services can help you manage these systems by helping you set them up, monitor incoming payments, and help you collect your income. Contact us today for support in managing your accounts receivable.