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Do you know which customer owes money to your business right now? Without a proper bookkeeping system in place, you may not be so sure. As your business grows, it’s essential that you have a proper infrastructure in place with an emphasis on both accounts payable and accounts receivable. If you feel like your small business is weak in this particular area, we can help you map out a game plan – starting right now!
Owing money is a constant and cyclical occurrence in business: you owe your suppliers money, and your customers owe you money. As your business evolves, the visibility into this ever-changing balance can get pretty foggy. In order to have a firm grasp on cash flow and financial health, you need to understand your monetary seesaw inside and out.
In a recent two-part series on the U.S. Small Business Administration Blog (separately entitled “How to Set Up and Manage Accounts Payable” and “How to Set Up and Manage Accounts Receivable”), Caron Beesley shares some fantastic insight into these “bookkeeping basic” tips. To best give you a comprehensive snapshot of both articles, we’ve included some of her top-line advice for implementing and improving these complementary systems below.
Many small businesses start shop with a basic spreadsheet-based accounting system. However, as a company grows and expands (i.e. receives more than two bills a day or generates 5-10+ invoices a day), it’s smart to look into a more formalized accounting system. Not only do these programs boost efficiency and accuracy, but they also streamline tax time process with increased confidence.
While there are many options available in the marketplace today, QuickBooks and Peachtree are widely popular choices. Others programs include Outright and Expensify – choose one that works for your business.
Depending on the software you choose, you’ll easily be able to keep track of your bills, expenses, invoices, and payments. In one clear snapshot, you’ll determine what money is going out and what money is coming in on both a short- and long-term basis. If you need advanced functionality (i.e. integration with timesheets including invoice generation), be sure the program meets all your needs before implementation.
Timeliness is the key to ensuring your accounts payable system is accurate. Enter all incoming bills each day, making sure the payment due date is clearly stated in your system. Enter business credit card expenses in real-time on the same day, including employee purchases. Keep paper copies of important documents on hand, too.
Establishing the right terms of payment is important for your accounts receivable. As soon as you take on a new client or recurring customer, define your billing agreement right away. How often will they be billed? Will it be every 15 days instead of the standard 30? Will it be a single project fee, or will the client be invoiced by hours spent on work? What are the hourly rates for the team members assigned to this job? These small details need to be discussed and locked down before the work begins. In addition, be sure to reiterate these contractual terms on invoices and other billing documents to ensure your terms are met with timely payments.
Concise and crystal-clear invoice generation is an art. In addition to your terms, make sure you include ALL necessary information so your client can approve and process your invoice quickly. Make sure your company logo is included on the letterhead, ensure your terms are specific (avoid phrases such as “due upon receipt” if you want to be paid within a certain timeframe), and make sure your customer knows exactly how this payment should be issued (i.e. to whom and to where). If this is an hourly project, indicate the hours incurred at the individual hourly rates. If this is an ongoing project, be clear in what you are billing for this particular time period. Include billable client expenses as separate line items.
On the accounts payable side, adhere to the same standards to which you hold your customers. Memorize the payment terms that you agreed to and pay your vendors on time. Remember, you’ll get bonus points for sending in your payment a couple days before the deadline!
When you are timely in both your account receivable and account payable systems, you’ll have a reliable cash flow figure that will help you operate your business more successfully – without the surprises.
While it’s never fun to knock on your client’s door for a missed payment, it is something with which you’ll need to become comfortable. According to a CODA survey in 2009, 25 percent of small and medium businesses estimate that at least $5,000 a month in income is delayed due to invoicing errors, with 17 percent seeing payments amounting to $50,000 delayed due to invoicing errors.
To avoid this hit, reach out to your client directly with a phone call. (Don’t waste time waiting for an email response if money is on the line!) Ask them if they have any questions or concerns with the invoice, letting them know the payment is late. More often than not, your client will have a valid and truthful explanation as to what happened. In this chat, confirm when you’ll be receiving the payment. If helpful, remind them of the contractual agreed-upon terms to ensure this delay won’t happen in the next payment round. If the current terms don’t work for them, figure out what does work and put it into place, nipping this payment delay problem in the bud.
If, at any point, you think you need some professional accounting help, go for it! Whether it’s an assistant, a full-time bookkeeper, outside accountant, or even a CFO, sign up for whatever option will be most advantageous for your company today and well into the future.
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References:
https://www.sba.gov/blogs/bookkeeping-basics-part-2-how-set-and-manage-accounts-receivable
https://www.sba.gov/blogs/bookkeeping-basics-part-1-how-set-and-manage-accounts-payable