Rainy Days & Reasonable Expectations

Growing Pains: Rainy Days & Reasonable Expectations

Managing accounts receivable as a small business owner

For small business owners, accounts receivable can be a major pain point. You do the work, send the invoice, but then the payment doesn’t arrive on time. This leaves you in a cash flow crunch, providing services without receiving timely compensation.

It’s easy to get frustrated with clients who are slow to pay. But managing your expectations around accounts receivable is key to maintaining positive relationships with customers and clients. Though you may experience growing pains when it comes to collecting on invoices, having reasonable expectations can make the process smoother.

This article will provide tips on how small business owners can set aside funds to account for unpaid invoices, communicate payment terms upfront with clients, follow up diligently but tactfully on outstanding payments, and know when to stop chasing payments altogether. With the right policies and procedures in place, you can take control of your accounts receivable in a way that works for your business.

The Reality of Outstanding Payments

Most customers pay their invoices on time, but the reality is some inevitably won’t, often through no fault of their own. Understanding the typical percentage of accounts receivable that go unpaid in your industry is important for reasonable financial planning and expectations.

For example, a 1-2% write-off rate is common in many B2B services, while 5-10% is more typical in B2C work. Construction firms and contractors often have even higher rates due to the nature of dispute resolution in projects. This percentage should be forecasted, tracked, and budgeted for.

While outstanding payments are frustrating, viewing them as an expected cost of doing business leads to smarter policies and prevents reactive decisions when tough situations arise. With proper controls in place, unpaid invoices become just another planned line item rather than an unexpected hit.

Set Aside Funds for Unpaid Invoices

One key step in managing accounts receivable is to set aside a portion of the outstanding balance that is unlikely to be collected. This is an accounting best practice that acknowledges the reality that not all customers will pay their invoices.

By treating a percentage of AR as potentially uncollectible, a business can plan ahead and have funds on hand to cover overhead expenses. Industry standards for the percentage to set aside range from 2-10% of outstanding AR. The exact percentage will depend on the business’s history with collections, payment terms, and the age of the receivables.

The amount set aside acts as a reserve to tap into when invoices go unpaid for an extended period. Rather than being surprised each month by a shortfall from uncollected payments, the reserve helps smooth out cash flow.

Some tips for setting up an accounts receivable reserve:

With proper planning and analysis, setting aside funds for uncollectible AR helps avoid unexpected cash flow crunches and offers a buffer for doing business with occasionally delinquent customers. The percentage set aside will reflect realistic expectations for collections.

Communicate Payment Terms Upfront

Clearly communicating payment terms and policies from the start can help avoid issues down the line. Take time to thoroughly explain payment timelines and late fee policies as part of your client onboarding process. Walk through examples of past-due notices and when fees would apply. Ensure clients understand that while you aim to maintain positive relationships, you also rely on timely payments as part of your business model.

Going the extra mile to proactively set expectations shows that you take your policies seriously. Send payment term reminders as invoice due dates approach. Highlight payment instructions and provide multiple options like ACH, credit card, PayPal, etc. Make it as easy as possible for clients to pay on time. Consistent communication reinforces that you value the relationship while expecting accountability.

Follow Up Diligently

Following up on overdue invoices is crucial to getting paid, but should be done tactfully. Start by checking in with a friendly email on the original due date to confirm the invoice was received and see if the client has any issues with paying on time. If there is no response after a few days, follow up again stating you want to resolve any problems and collect payment.

Set reminders to systematically send payment reminders a certain number of days after the due date, such as at 15, 30, 45 and 60 days overdue. Scale the urgency but remain professional. After the second notice, you may indicate potential next steps like referral to collections. However, take care not to threaten or annoy clients. The goal is maintaining the relationship while securing what you are owed.

With diligent, structured follow-up, you can collect payment on most invoices before they become seriously delinquent. Tracking reminders also helps you identify any habitual late payers. Just remember to always communicate with respect and offer support. Your prompt invoices and gentle nudges will teach clients you expect timely payment.

Offer Payment Plans

For clients having trouble paying their full balance, it can be better to get partial payment rather than no payment at all. Offer to work with them on an installment plan or payment schedule. This shows that you care about the relationship more than the money, and it gives them a path to paying the full amount over time.

Start the conversation by acknowledging their situation with empathy and asking how you can help. Propose breaking the total into smaller, more manageable monthly payments. Offer different options based on what seems realistic for their budget.

Make it clear that you want to continue working together and this will allow things to keep running smoothly. If needed, you can negotiate a reasonable interest rate on the installments. The important thing is keeping communication open and finding a compromise.

With an agreed payment plan, follow up at the end of each month to kindly remind them and receive the next payment. Adjust the schedule if needed based on any new circumstances that arise. The personal attention makes clients feel supported, not harassed.

Partial payments spread over time can be far better than nothing. With reasonable terms and genuine care for the relationship, payment plans enable clients to pay their balances while keeping accounts active and projects moving forward.

Prioritize the Relationship

As frustrating as late payments can be, it’s important not to let it damage your relationship with the client. Avoid being accusatory or aggressive in your communication. The goal should be working together, not making it an adversarial situation.

Keep the tone professional and understanding in all correspondence. Recognize that the client may be facing circumstances out of their control, such as an unexpected loss of business, payroll issues, or other cash flow problems. With empathy and patience, you’re more likely to maintain trust and goodwill.

Make it clear you value the relationship first and want to find a reasonable solution. Offer flexibility in structuring a payment plan, perhaps with smaller increments over a longer period. This shows you aim to support their business, not punish them. The stronger the relationship, the higher the chance of receiving payment in full eventually.

Of course, there are limits if a client consistently pays late or tries to avoid payment. But in general, lead with understanding to preserve the mutual respect and partnership you’ve built with the client. This will pay dividends in the long run.

Know When to Stop Chasing

Every business owner faces the frustrating reality of accounts receivable that go unpaid. You’ve followed up multiple times, offered payment plans, and done everything possible to get the client to pay. At some point, further attempts become fruitless and it’s time to cut your losses.

As difficult as it is, know when to stop chasing payments that seem unlikely to ever materialize. Continuing collection efforts indefinitely wastes precious time and energy that could be better spent elsewhere. Review how much you’ve already spent trying to collect compared to the amount owed – is it still worth it?

Set a cutoff for when you will cease active collection attempts and write off the unpaid invoice. Whether it’s after a certain number of contacts or a specific dollar amount or timeframe, decide on your boundary and stick to it.

Once you’ve reached that point, document the situation and write off the receivable. This clears it from your books and allows you to mentally move on as well. While you can legally continue pursuing payment, sometimes it’s better for your stress levels and business relationships to let it go. Focus your energy on serving clients who respect your time and services.

Knowing when to stop chasing pavements takes experience. But over time, you’ll find the right balance for your business. Don’t allow uncollected debts to consume your daily operations. And make sure to evaluate your boundaries periodically to ensure they align with the health of your company. With reasonable expectations and selective payment follow-ups, you’ll minimize wasted efforts while still maintaining positive cash flow.

Review Policies Periodically

As your business grows and changes over time, it’s important to periodically review your accounts receivable policies to ensure they are still serving you well. What worked when you were just starting out may no longer be the best approach years down the line.

Take some time every 6-12 months to re-evaluate your AR tactics. Look at your aging reports to see if you need to shorten or extend your collection timeframes. Analyze your write-off rates – are you writing off too much or leaving yourself exposed? Check if your follow-up process is still effective.

You may find you need to tighten up on slow-paying customers or get more aggressive with collections. Or perhaps your experience shows you need a bit more patience and flexibility.

The goal is to fine-tune your AR policies over time based on the evolving reality of your business. Don’t just set it and forget it. Keep what works, change what doesn’t, and don’t be afraid to try new strategies. With regular reviews, you can maintain accounts receivable practices that help your cash flow and bottom line.

Conclusion

Running a business inevitably involves dealing with late or unpaid invoices. While it’s frustrating to not receive payment for services rendered, maintaining reasonable expectations helps business owners stay focused on long-term success.

This article has covered several tips for managing outstanding accounts receivables:

The reality is that even with the most diligent practices, some percentage of invoices will go unpaid. This is simply the cost of doing business. By planning ahead and staying focused on positive progress, entrepreneurs can take bad debt in stride. With persistence, understanding, and smart money management, small businesses can thrive despite the occasional rainy day.