Avoiding Common Accounts Receivable Pitfalls

You went into business because you know you have a valuable service or product to offer. You rely on payments for your goods and services in order to keep your business afloat, which is why getting paid in a timely manner is crucial to your healthy cash flow. The longer it takes for your client to pay you, the more likely it is that you will never collect that money. Let’s talk about how you can avoid common pitfalls when it comes to Accounts Receivable.

According to the U.S. Department of Commerce, the likelihood of collecting on an overdue account decreases significantly with time. The longer you wait, the less likely you are to ever see that money. In this article, we’ll explore common mistakes in accounts receivable management and how to avoid them, ensuring that you get paid promptly and fairly.

Why Aging Collections Are Hard on Your Business

The Time Value of Money (TVM) means that an amount of money is worth more TODAY than that same amount will be worth in the future, because of the potential earning capacity. You can take that money today and invest it, but you obviously cannot invest money that hasn’t yet been received. Nor can your business spend that money (that hasn’t yet been received) on important business expenses.

Remember Wimpy from the old Popeye cartoon? “I’ll gladly pay you Tuesday for a hamburger today.” Anyone who took Wimpy up on his offer showed financial irresponsibility!

As you see in the graph above, as the days past due increase, the likelihood of collecting the full amount decreases significantly, which means your business cannot maintain a healthy cash flow. The strain on your business’s finances can cause major headaches!

The stress and administrative burden of chasing overdue accounts is taxing on your team. Nobody likes to be “the bad guy” who is hounding someone for money, so it causes anxiety for the person responsible. Not to mention the fact that your team very likely doesn’t have extra time in their schedule to be spent chasing down money. This, in turn, affects relationships with clients. But the concern about negative reviews and your overall business reputation is at stake, so the matter must be handled professionally. It can be hard to remain professional in a small business when every dollar matters!

Common Accounts Receivable Mistakes to Avoid

Delayed Invoicing

One of the most common pitfalls in accounts receivable is delayed invoicing. Without a system in place to send out invoices promptly, you risk creating cash flow problems that could hinder your ability to pay your own bills or invest in your business. Prompt invoicing not only keeps your cash flow steady but also reinforces the importance of timely payment to your clients.

Overly Detailed Invoices

While it’s important to be clear, providing too much detail on an invoice can lead to confusion and potential disputes. When clients receive an overly detailed invoice, they may spend unnecessary time trying to decipher it, which can delay payment. To avoid this, keep your invoices clear, concise, and easy to understand. Provide just enough detail to clarify the charges without overwhelming your client.

Vague Descriptions

On the flip side, being too vague with your invoice descriptions can also cause issues. If a client can’t easily understand what they’re being billed for, they’re likely to set the invoice aside “to look at later,” which often results in payment delays. Ensure your descriptions are specific enough to provide clarity, reducing the likelihood of follow-up questions and disputes.

Undefined Payment Terms

Setting clear payment terms upfront is crucial for avoiding misunderstandings and late payments. Without defined payment terms, clients may assume they have more time to pay, or worse, may simply forget. Clearly state your payment terms on every invoice, including due dates and any penalties for late payment. This will help set expectations and encourage timely payments.

Top 4 Reasons Clients Don’t Pay You

Contrary to popular belief, most clients don’t delay payment because they’re difficult or unwilling. The majority of payment delays can be traced back to the following reasons:

The Bill Did Not Reach the Right Person: Whether due to incorrect email addresses, wrong contacts within the company, or changes in address or phone numbers, misdirected invoices are a common reason for payment delays. Ensuring that your invoices are sent to the right person is critical.
The Bill Was Confusing: If an invoice is unclear or complicated, the client might set it aside to review “later”—a time that often never comes. Clear, straightforward invoices minimize this risk.
Delayed Invoicing: If it takes too long for the client to receive the bill, they may not even remember the details of the work or product being billed. Timeliness is key in maintaining the relevance of the invoice.
Issues with the Invoice: If there’s something on the invoice that the client questions, they may delay payment until they get answers. Addressing these concerns promptly and ensuring the invoice is accurate can help avoid such delays.

Adopt Best Practices in Invoicing and Collections

So how do you set yourself up for success and collect your money in a timely manner? It’s not always a case of the client being a slacker. If you have good processes in place, you will be able to collect in a timely and efficient manner. Here are some strategies:

Have systems in place to send invoices PROMPTLY! Any delays can lead to cash flow issues. Sometimes it took so long to receive the invoice that they don’t even remember what you are billing them for. The sooner you invoice, the sooner you will get paid.
Keet your invoices clear and concise. Short and sweet is best, as too much detail can lead to confusion and disputes.
Make sure your invoices are descriptive. Vague descriptions result in questions and delays in payment. If the invoice is confusing, it will be set aside to be looked at “when they have more time”. Get it right the first time!
Set clear payment terms up front. Always use a contract that specifies payment terms, due dates, and late fees. Undefined payment terms result in misunderstandings and late payments. The invoice should clearly state payment terms (i.e., “net 30” meaning the payment is due within 30 days of the invoice date).
Make sure the correct person actually receives the invoice. Make sure you use the correct email or street address and have the correct company contact. If they never receive the invoice, they don’t know to pay it!
Use invoicing software. Automate your invoicing, track payments, and send reminders using software such as QuickBooks Online. For clients on retainer or subscriptions, recurring billing helps ensure accuracy.
Make it easy for the client to pay. Offer various payment methods (credit card, ACH, PayPal, etc.) so that the client doesn’t have to jump through hoops to pay you. Digital payment systems allow clients to pay directly through the invoicing, making it easier for them.

Next Steps to Avoid Accounts Receivable Pitfalls

To avoid these pitfalls, it’s essential for small business owners to adopt best practices in invoicing and collections. By being proactive—sending invoices promptly, keeping them clear and concise, and setting well-defined payment terms—you can significantly improve your chances of getting paid on time.

Remember, managing accounts receivable effectively is not just about keeping the cash flow healthy; it’s about fostering strong client relationships and ensuring the long-term growth of your business. Start implementing these strategies today, and watch your business thrive.

Ready to take control of your accounts receivable? Start by reviewing your current invoicing process and making the necessary adjustments to avoid the common pitfalls we’ve discussed. A little effort now can lead to healthier cash flow and a more successful business in the long run. Don’t wait—start today!

This proactive approach to invoicing and collections will lead to a healthier cash flow for your business, better relationships with your clients, less stress on your staff, and as a result – business growth. Win / win / win!

Next month, we will talk more about reducing friction in collections. Until then, Happy Invoicing! Have questions? Feel free to reach out.