15 Oct The Art of Getting Paid, Part 3: Using QuickBooks to Manage the Collections Process
In this content series, we have been discussing the art form of getting paid as a small business owner. Yes, it’s an art form! The first article discussed avoiding common pitfalls in Accounts Receivables, with a focus on the importance of accuracy in invoicing and the Time Value of Money. Our second article took a deeper dive into reducing friction in collections. This month, you’ll learn how you can use QuickBooks Online to make your collections process even more effective.
The Art of Getting Paid: Common Pitfalls and Reducing Friction in the Collections Process
Need a refresher on what we’ve learned so far? First, we focused on 4 main principles of collections:
- Don’t delay your invoicing!
The smaller the business, the busier the owner often is delivering on client commitments. Many owners feel they don’t have time to set up invoicing and collect. Don’t make this mistake! You will find that when you finally do free up time for invoicing, you’ll have no clients left to send bills to. - Provide simplified invoices…
Make sure your invoice provides enough detail for the client to remember what they bought, but not so much detail that they have reason to question your expertise and billing. - …But don’t be too vague!
Help the client remember what you did for them. Set your invoice up to go out quickly upon completion of service and be just detailed enough that there is no question that they owe you money for your expertise. - Offer clear payment terms…communicate, communicate, communicate!
Set up payment terms before the contract is signed, and review those payment terms in the first meeting with the client. Remind them at benchmark points throughout the service delivery. Lastly, finish strong with a final billing that outlines the final steps of your project. Communication and repetition of payment terms are invaluable in setting yourself up for strong receivables.
Our second article took a deeper dive into “Setting Yourself Up for Success: Reducing Friction in Collections.” It was all about making it easy for your clients to pay you and reducing ways to confuse them or making the steps required difficult to complete. Everything you offer to clients should be easy to execute and commit to, on behalf of the client.
How mastering QuickBooks Online can Enhance Your Collections Process
Automating your invoicing has many benefits. They include increased efficiency, lower risk of human error, and quick and accurate invoice reconciliation, making things easier on your client. Ultimately, you’ll get paid faster (which helps your cash flow) and be able to offer enhanced customer service. As QuickBooks Online (QBO) ProAdvisors, we love all the features QBO offers to help the small business owner get paid faster.
So let’s get into the nitty gritty of using QBO for managing clients and sales by using the Products and Services List, Client’s List, Invoices vs. Receipts, Recording Payments, and Applying Payments.
First, you will need a strong Products and Services List
In QuickBooks Online, the Products and Services list is a central feature that allows you to manage the goods, services, and other items your business sells. This makes it easier to create invoices, sales receipts, and purchase orders. Remember, you are in a data in/data out system. Your invoicing is only as good and descriptive as the hierarchy you build in your Products and Services list.
A strong Products and Services List includes the following:
Revenue streams that tie directly to cost of goods and services
- Navigation: Go to the Sales menu on the left-hand side of the QuickBooks Online dashboard. Under Sales, select Products and Services to view your list.
- View and Manage: From here, you can view all the products and services you offer, along with details such as price, quantity on hand (for inventory items), and type.
- It is important to connect product/service sold to the COGS side of the transaction via mapping. This will allow you to report on a strong gross profit or loss on different revenue streams.
Types of Products and Services correctly defined in this list
- Inventory: Items you purchase and resell. QuickBooks tracks inventory levels and cost of goods sold (COGS).
- Non-Inventory: Items you buy or sell but don’t track inventory for, such as supplies.
- Services: Non-physical items like consulting, repair work, or other professional services.
- Bundle: A combination of products and/or services that you sell together.
Using Products and Services in Transactions
- Invoices and Sales Receipts: When creating invoices or sales receipts, you can select items from your Products and Services list, which automatically fills in details like description, price, and quantity.
- Purchase Orders: For inventory items, you can create purchase orders to restock your inventory directly from the Products and Services list.
Managing your Products and Services list effectively in QuickBooks Online helps streamline your sales and inventory processes, ensuring accurate financial reporting and efficient business operations.
Automate your Client Invoicing
Once you have added a client to QuickBooks Online, you may create and manage invoices, payments, and other transactions. Here’s how to set up clients in QBO:
- Use QBO to set up rules and recurrence so that invoicing becomes as automated as possible. QBO allows you to save recurring invoices and to determine how often and when a new invoice will be created, without having to type this info in, one invoice at a time.
- By setting up recurring revenue on automations within QBO, you won’t waste your time customizing invoices or making them repeatable, or separating by class or location, or plain old forgetting to invoice.
When to use an Invoice vs. Receipt in the Collections Process
In QuickBooks Online, invoices and receipts serve different purposes, although both are used for tracking income and sales transactions. Here’s a breakdown of the differences:
Invoices
Invoices are used when you sell goods or services on credit, meaning the customer will pay you later. If you allow customers to pay at a later date (i.e., offering net 30 or net 60 payment terms), you would send them an invoice. Invoices show the total amount due and any payment terms. Additionally, they track the payment status (e.g., unpaid, partially paid, paid). Invoices can be customized to include due dates, payment terms, discounts, etc.
How does an invoice impact your accounting? An invoice creates an accounts receivable transaction, meaning it increases income even if the cash hasn’t been received yet.
Examples include retainers/down payments, large orders from wholesale vendors, B to B or B to G purchases.
How to Create an Invoice for a Client in QuickBooks Online
- Go to the “Sales” menu, then click “Invoices”
- Click “New Invoice”
- Select the client from the dropdown menu.
- Add the products or services sold, and the relevant quantity and rate.
- Set the due date based on the payment terms.
- You can send the invoice directly from QuickBooks by clicking “Save and send”.
How to Manage and Track Invoices in QuickBooks Online
- Under the Sales tab, go to Invoices to view all invoices.
- Filter invoices by status (e.g., Paid, Unpaid, Overdue) to manage your receivables effectively.
- Use the Send Reminder option for overdue invoices to prompt clients to pay.
Sales Receipts
Receipts are used to document completed transactions where the customer has already paid in full. When the customer pays immediately, whether by cash, credit card, or check, you should generate a receipt. A receipt confirms payment and serves as proof of purchase for the customer. It shows the amount paid and the payment method.
How does a receipt impact your accounting? It records a sales income transaction and applies the payment immediately, impacting your cash balance right away.
Examples include B to C purchasing, payment at the time of purchase, online ordering (usually consumer purchases), automated recurring payments.
How to Create a Sales Receipt in QuickBooks Online
- Go to the “+New” Button (in the left-hand menu)
- Select “Sales Receipt” (under the “Customers” section)
- Fill in the Sales Receipt Details (select the customer, or add them if it’s a new customer, add the date and the payment method).
Key Differences between Invoices and Receipts
Invoices are for deferred payment (accounts receivable), to be used when payment comes later. Receipts are for immediate payment (cash transaction), to be used when payment comes on the spot.
Determine whether you need to Record Payments or Apply Payments
In QuickBooks Online, there’s a key difference between recording payments and applying payments, and it primarily comes down to the timing and context of the transactions.
Key differences between Recording Payments and Applying Payments in the collections process:
| Feature | Recording Payments | Applying Payments |
| Purpose | To document that money was received (or paid) without necessarily linking it to a transaction | To link the recorded payment to a specific invoice or bill to clear the balance |
| When it Occurs | When you first receive or make a payment | After the payment has been recorded and needs to be applied to an open transaction |
| Accounting Impact | Adds a payment to your accounts but may leave invoices or bills unpaid until applied | Reduces the balance of specific invoices (accounts receivable) or bills (accounts payable) |
| Examples | Customer sends a payment, but you haven’t yet selected which invoice it pays off | A customer payment is applied to an invoice to mark it as paid |
| Summary | This happens first when you receive or make a payment, but it might not be tied to a specific invoice or bill yet. | This links the recorded payment to the correct transaction (invoice or bill), ensuring that your books reflect cleared balances and paid transactions. |
Accounts Receivable and a solid collections process should be a top priority in any sustainable, profitable business. Set your company up for permanent success in Accounts Receivable with collections processes that reduce confusion and friction. Utilize QuickBooks Online to automate your collection steps and manage your clients and sales. You’ll find you can increase efficiency, streamline your accounting processes, improve cash flow, and maintain better control over your business finances.
Have questions about the art of getting paid and how you may be able to improve your collections process? Reach out! We’d love to help.
