We all know that cash is king. What we sometimes forget is that more than 60% of a typical company’s working cash is tied up in accounts receivable—the money your customers owe you, but have not yet paid. The problem is, it can take a lot of time and effort to get customers to pay the money they owe you in a timely manner. Having fantastic bookkeeping processes can help focus your efforts where they will do the most good (and produce the most cash).
The link between accounts receivable and bookkeeping comes down to accurately recording both invoices and payments. It sounds like Bookkeeping 101, but when business owners have a lot on their plate, the linkages can often break down. That’s why having an excellent bookkeeper—whether that’s in-house or with an outsourced solution like OpenDigits—is so important to manage accounts receivable and, ultimately, to manage your cash flow.
Invoices and the Lottery
Have you ever heard the old adage, “you can’t win if you don’t play?” Never has this been so true as when applied to your accounts receivable. Getting invoices properly recorded and out the door is the first step in getting cash in the door.
A good invoicing process requires discipline and structure. While your bookkeeper may or may not be the one who actually assembles and sends invoices, they can and should play a part in setting the framework for this important task. This ensures that both financial reporting and cash application can flow smoothly—both of which are critical to collections success.
For instance, there should be a record of each invoice in your accounting system that has enough detail that incoming payments can be easily and quickly applied to open invoices. Any updates to the invoice, such as discounts or late fees applied, should be recorded in the accounting system as well. Invoicing should also be performed in a timely manner, and a good bookkeeper can help everyone stay on schedule as part of the regular monthly routine.
As much as we hate it, there are times when, despite our best efforts, we know an invoice will never get paid. Perhaps the customer’s business has closed and there are no funds left to pay. Perhaps there was a service dispute that just can’t be resolved. After best efforts are expended, it may be time to write off that invoice.
The impact of write-offs on your financials largely depends on whether you use cash accounting or accrual accounting. In accrual accounting, revenue may have already been recognized for the invoice that needs to be written off, which means write-offs will affect current period income unless bad debt reserves were previously set aside. In cash-basis accounting, income is not recognized until the funds are received, so only future cash flow expectations are affected by write-offs.
However, regardless of which accounting convention you use, it’s critical to have a bookkeeping process that accurately identifies and cleanly clears out uncollectible invoices. Strong and regular communication is the key. Clearing out the clutter in your accounts receivable allows those performing collections activities to laser focus on invoices that are collectible, without having to wade through the clutter.
There are a surprising number of business owners who are leaving money on the table—or more literally, in the mailbox. It’s estimated that, on any given day of the year, more than $250 million in receivables has been sitting at its destination, idle and uncashed, for in excess of 3 business days. That’s a quarter billion in uncashed funds just waiting to be put to use. The problem? Businesses are too busy to go down to the mailbox, sort through the mail, and record their incoming payments.
Not only is this a tremendous waste of cash, but it’s also a nightmare for your collections efforts. Without those funds being accurately recorded, you may be wasting collections time on invoices that have already been paid. Worse yet, attempting collections against an invoice that has already been paid is a poor customer experience…and it may even be illegal. Calling on an invoice that has already been paid can be considered misrepresentation of debt and could land your company in hot water.
Effective bookkeeping is the solution. Having a bookkeeper who is responsible for ensuring all payments are deposited and all deposits are matched against outstanding invoices is critical in ensuring collections efforts are efficient.
At the end of the day, it’s clear that great bookkeeping is more than just getting ready for tax time or producing pretty charts. Bookkeeping can play a major role in making sure collections efforts are focused and effective, resulting in more cash on hand for your business to grow. Of course, having a clear picture of what’s owed is only the first step. To ensure collections are handled consistently and efficiently, consider using an outsourced accounts receivable solution like InvoiceCare so you can get paid on time, every time.
Elaine O’Gorman is CEO of InvoiceCare and a popular speaker and writer on business growth topics. InvoiceCare provides clients with a virtual receivables specialist that tracks and follows up on invoices from the moment they are issued until the money is received, so you can get paid on time, every time.