Managing Your Small Business Accounts Payable and Receivable

Managing Your Small Business Accounts Payable and Receivable

When you look at your business’s performance, you’re often looking at the cash coming in and out to see how it’s doing, right? The problem with that is you’re only looking at part of the picture. To effectively manage and grow your business, you’ll need to look at what’s happening now and what’s on the horizon. To do that, you’ll need to understand your business’s accounts payable and receivable.

What are accounts payable and receivable?

Your accounts payable (A/P) are bills for services that your business has already used or goods that your business has already received. If you have a $1,000 in accounts payable, you’ll need to spend $1,000 in the very near future to pay off those bills. On the other hand, accounts receivable (A/R) are invoices that your business has issued that haven’t been partially or completely paid. Your A/R is money that’s owed to you.

Not all businesses have the same experiences when it comes to accounts payable and receivable. For example, a restaurant has little to no A/R or A/P. They pay for their food product when it’s delivered and charge their customers for their meals before they leave. A construction business, on the other hand, has a lot of both. Their customers usually take a month or more to pay off their invoices, and the business might use subcontractors who typically do not pay for several weeks.

Accounts payable and receivable matter for your business’s future cash flow. If you’re operating your business on a cash basis, your receivables are the cash that will be coming in and your payables are the cash that will be going out.

The longer it takes for your receivables to come in, the more cash in the bank you’ll need to fund your operating expenses in the meantime. The longer you take to pay your payables, the more cash you’ll have in hand to continue funding your operation.

Account Receivables

Do you even need to offer credit?

The number one error that you can make with accounts receivable is assuming that it’s something that you can put off. Before making this part of your business, ask yourself: can you ask your customers to pay upfront? If not, can you ask them to pay a large deposit upfront?

You can often find the answers to these questions by looking at what the best practices are for your industry, but don’t be afraid to push the boundaries of those norms. Any money you receive from your customers sooner rather than later will benefit your business’s cash flow.

Make your payment terms strict.

Setting clear boundaries and deadlines is very important when it comes to customer credit. Set your invoices to be “due upon receipt,” meaning due immediately. You’ll also need to establish a clear penalty for payments that haven’t been made in 30 days (such as accrued interest or a flat fee).

When these terms are laid-out from the start of a relationship with a new customer, it creates a strong incentive for them to pay on time. If they violate your payment terms, stop offering credit to the customer, and immediately stop all work for them until they settle their outstanding balance.

Ask your customers to pay you!

When it comes time for you to ask your customers to pay you, this is when the business relationship gets serious and becomes a dynamic of mutual respect and cooperation. There’s never a “right” time to ask your client to pay you.

There’s nothing wrong with invoicing your customers immediately after giving them their products or services, or exactly on the date you said you would invoice them. Sending your customers reminders to pay you if they’re late, and even informing them of your dissatisfaction, is important as well. Your relationship with your customers should be equal. You give them goods and services on a timely basis, and they must pay you on a timely basis.

Good invoicing platforms have tracking capabilities, and you’ll likely find this capability in your bookkeeping program. This means that you can see when your customers received their invoice via email, and each time they view the invoice. These tools give you more footing in a discussion with your customers about settling their outstanding balances and make assigning payments to the right invoice foolproof.

Set up credit policies

As your business grows, it helps to set up rules and guidelines for offering credit to your customers. This should start when you onboard a new customer. Do your research on your customer. If they make purchases from large vendors, they likely have a Dun and Bradstreet report. This will tell you exactly how much money they owe to large vendors and if they pay on time or late. Make sure to ask for recommendation letters, and if you’re getting into a big enough contract, you can ask to see their financial statements as well.

If you’re selling services, put payment terms in a clear, discrete section of your engagement letter. Break down each part of your overall scope of work, when it will be invoiced, when that invoice is due, and what the penalties will be for late payments. If you sell products, provide your customers with your terms prior to selling them your products or services.

It’s also good practice to define and communicate a schedule of “earning” credit for your customers. One way you can approach this is to have all of your customers pay immediately for the first year, and then offer them up to 30 days of credit after that.

By waiting a year to offer credit to your customers, you can gauge how they handle payments during their busiest and their slowest seasons and act accordingly. If a customer has trouble consistently paying on time, then you know not to offer them credit.

A system like this can be difficult to put in place, especially if you have very large customers who make up a big portion of your sales. These customers will try to bend the rules because they know you depend on their sales. You can lower the risk of this by growing a diverse pool of customers who evenly make up your business’s income.

Accounts payable

Earn respect by being respectful

Your vendors are businesses with many of the same cash flow concerns that you have. It might seem enticing to stretch out your payments, but that can be short sighted.

Building a relationship with your vendors means paying on their terms. Once you build a reliable history of on-time payments, then you can negotiate a payment term that is fair for them and you.

Use your bookkeeping software’s bill management tools

All good bookkeeping software includes a module for bill management. Use these tools to their full extent! If you enter every bill you receive into the bill manager, you’ll never miss a payment. You’ll also get alerts for upcoming bills, plus you can even pay your bills and have checks printed automatically. Using these tools will make the financial statements generated by your bookkeeping software more accurate and provide you with more insight into your business.

What if you can’t pay?

At some point you may need to tell your vendors that you’re not going to be able to meet their payment deadlines. Mastering this conversation is key to coming out of these situations with vendor relationships intact. Be candid about your situation. Reach out to your vendors proactively – ideally before the deadline.

There are some steps you can take to avoid this scenario in the first place. One way is having a higher-cost credit card that you can use only as an emergency if you think your cash flow will have a gap this month. Another strategy is to secure a line of credit. These generally carry a lower interest rate than credit cards and allow you to carry a balance until your accounts receivables are paid.

Need working capital to cover your cash flow gaps? Reach out to Pursuit

Having a good understanding of your receivables and payables is critical to your business’s cash flow. By following these tips, you’ll be able to have a clear picture of what you owe and what’s owed to you at any given moment, and be able to proactively handle any cash flow issues.

If you need some extra working capital to cover your cash flow gaps before your receivables are paid, reach out to Pursuit. With more than 15 different loan products, we can help you couver your funding needs so you can keep your business moving forward.

Subscribe to The Goal Getter

Get the business insights and answers you need to navigate your business loan options.

By clicking "Subscribe" you agree to our terms and conditions.

Related articles

Find flexible, affordable business loan options

Subscribe to The Goal Getter

Get the business insights and answers you need to navigate your business loan options.
By clicking the button above, you agree to our terms and conditions.

You are about to leave the Pursuit website

Pursuit provides links from this website to other websites for your information only. Pursuit does not recommend or endorse any product or service appearing on these third party sites, and disclaims all liability in connection with such products or services. We are not responsible for the privacy practices, security, confidentiality or the content of any website other than our own. Pursuit does not represent members or third parties should the two enter into an online transaction, and recommends that you appropriately investigate any products or services prior to purchase. Questions as appropriate to the content should be directed to the site owners.