Best Practices to Minimize the Receivables Drag

Natalia Autenrieth In her professional lives across the United States, Natalia Autenrieth, CPA has audited Fortune 500 clients as part of a Big 4 team, built an accounting department as a controller of a large hospital, and served as a CPA consultant to municipalities. Today, Natalia coaches in the financial industry and writes about business finance, financial technology, and personal money management. Her ghost-written articles have appeared in thought leadership and expert blogs, as well as Kiplinger and Accounting Today. Read more about Natalia and her practice at

Best Practices to Minimize the Receivables Drag

Best Practices to Minimize the Receivables Drag

Do accounts receivables ever get you down?

Offering trade credit to customers is common business courtesy these days. The use of accounts receivable isn’t limited to large enterprises. Small businesses of all kinds, from freelancing graphic design artists to coffee shops, rely on it to offer their customers and clients a convenient way to streamline payments.

Unfortunately, doing business without immediate payment can have negative side effects. Few entrepreneurs started their company because they had a natural strength or training in managing receivables. As a result, this important part of the cashflow cycle can often suffer from poor design and inconsistent implementation.

The good news is that constructive receivables management does not have to be overly complex or time-consuming. With just a few simple changes, you may find that the process of granting and collecting receivables can take less time and build stronger client relationships.

Pre-Screen Before Granting Credit

Offering goods or services with a delayed payment puts you in the business of making decisions on credit-worthiness. Just as a banking institution would not open a line of credit without some preliminary checks, neither should you. Build an internal policy and process that your team can follow to make better decisions. Evaluate the client’s history and financial strength. Be sure both parties are clear on the terms and consequences of the account falling into delinquent status.

Create a Great Invoicing Process

You need a clear procedure on when and how your business will issue invoices. Some prefer to bill clients as work is performed or goods are delivered, others bill everyone at the end of the month. No matter which path you choose, apply it consistently for best results.

After invoices are emailed or mailed out, take the extra step of double-checking that they were received. After all, emails get misdelivered into the spam folder, and mail gets lost occasionally. Use this as an opportunity to ask whether the customer has any questions or feedback on the product.

Review Receivables Monthly

Be sure to track outstanding receivable balances and review them regularly. Most small businesses set up a monthly analysis of receivables by age. One way to designate the age “buckets” is by grouping together account balances that are current (or under 30 days old), 31-60 days old, 61 to 90 days old, and older than 90 days. Pay special attention to accounts in the older buckets, as older accounts are statistically harder to collect.

Another helpful analysis is accounts receivable by client. If you discover that a large portion of your receivables is tied to one or two clients, your business is exposed to greater liquidity risk should something happen in those clients’ lives or businesses. Stay in close conversation with them, work on helping them reduce the balance, and keep the outstanding invoices as current as possible.

Don’t Wait to Follow Up

Collecting on outstanding receivables is not your primary job, and many small business owners wait until the receivables age considerably before they reach out to the client to check on payment progress. Remember that receivables are not like fine wine – they do not get better with age. Stay on top of outstanding accounts, especially if the balances are large or growing.

Follow-up does not have to be aggressive or confrontational in order to be effective. Opt for clarity, a shared understanding, and a consistent follow-through on next steps. Train your staff to clearly identify what will happen next (i.e. a payment will be made within 10 days) and document it in the notes. This will help you during subsequent conversations and provide a written record of your attempts to collect that may be useful if the efforts have to be taken to court.

Your Best Practices for Managing Receivables

If your business chooses to accept delayed payments, risk mitigation must start at the point of extending credit. Create a screening system to ensure that only credit-worthy customers are granted this convenience, and make sure both sides are clear on terms and consequences. Review receivable balances monthly, both by age and by customer, to catch any early warning signs of liquidity problems.

Finally, don’t procrastinate on balance monitoring and follow up. A decision to extend credit enmeshes the financial health of the buyer and the seller, so it’s critical to keep the communication channels open and re-assess the wisdom of continuing to grant additional periodically.