How Do Small Business Owners Handle Accounts Receivable?

Running a business requires you to wear many hats and understand a multitude of processes to keep things running efficiently. Finance is one such area where the processes can be complex and numerous.

Keeping abreast of your accounts is crucial as you need to know how much money is coming into the business. Keeping accurate and up-to-date records allows you to understand what is happening in the business in real-time and let you plan accordingly.

However, handling accounts can seem daunting, especially if you’re dealing with other areas of the business at the same time. To help you get to grips with this area of finance, a multitude of tools and resources is available to assist you and make your life easier. 

With that said, let’s take a deep dive into what accounts receivable accounting actually is and how you can best cover this area.

What is Accounts Receivable?

Accounts receivable is essentially the money owed to your business from clients or outstanding invoices. It means you have already delivered the required product or service, and now you are waiting to be paid for it.

It can be viewed as a line of credit extended by the business and includes repayment terms that require the client to pay you within a certain time period. This can range from a couple of days through to a whole year.

Businesses record all accounts receivable information as current assets on the balance sheet. It allows you to understand the liquidity of the business and plan for and cover your financial obligations.

The Different Types of Accounts Receivable

Overall, there are four different types of accounts receivable that you need to be aware of. Noting the difference gives you an overview of the relationship between your business and the account holder.

  • Accounts Receivable: This refers to the amount of money you need to collect from the customer in exchange for goods and services. Accounts receivable are typically due within a month or two.
  • Notes Receivable: This is similar to accounts receivable but with a much longer deadline to pay. Notes receivable can have a payment deadline of a year or more. Payments are generally received in installments. No interest is charged unless the payment deadline is breached.
  • Trade Receivable: This refers to a product or service that you sell to a customer on credit and is the actual outcome of a sale made by your business.
  • Other Receivables: These are salary receivables, employee advances, interest receivables, loans given to other companies or employees, wage advances, and tax refunds

What is the Difference Between Accounts Receivable and Payable?

Accounts receivable and payable go hand-in-hand but are the exact opposite of each other. While accounts receivable deals with the money coming into the business accounts payable deals with the money that your business owes. For example, any invoices you receive for goods, services, and inventory. Staff salaries, utility bills, and commercial building rent are also examples of accounts payable.

Account receivables are viewed as a business asset. Account payables are classified as a liability. Having visibility of money coming in as well as money going out allows you to plan accordingly and keep your business sufficiently liquid.

Some Examples of Accounts Receivable

There are many different types of accounts receivable, but the main ones are:

  • Sale of goods and products
  • Delivery and supply of a service
  • The loan of money
  • The provision of credit
  • Deferred revenue

What is the Goal of Accounts Receivable?

The main objective of accounts receivable is to improve your cash flow and enable you to have enough liquidity to fulfill your own financial obligations. It will also help prevent a build-up of debt and works to reduce losses.

Offering credit facilities to clients also helps to boost your sales and, ultimately, your profit. You will also establish good working relationships with your clients and improve your chances of being recommended.

How Do Small Businesses Handle Accounts Receivable Differently?

The key difference between small businesses and larger ones is that a large business will tend to have a dedicated team in place to take care of all aspects of financial management. On the other hand, small businesses likely don’t have the need for a full-time accountant, nor will they have available resources to pay for one.

Therefore, it usually falls on the business owner to keep track of all monies owed as well as other accounting tasks.

How is Tracking Accounts Receivable Unique in a Small Business?

Accounts receivable are the same whether you’re a mom-and-pop store or a corporation. The unique difference is the number of resources available to help you handle the task. 

Unfortunately, many small businesses don’t understand the importance of keeping accurate records and therefore let this area slip. Large companies will know exactly where they stand financially – right down to the most minute detail. A startup will likely have only a general overview or, worse, no overview at all if they fail to keep their records up to date.

Are Accounts Receivable Your Largest Asset?

Determining the value of a company’s assets is complex. This is because they generally require a lot of upfront investment while many other factors affect their overall value. 

While accounts receivable are certainly a large asset, the largest asset for a business will normally be what’s referred to as “fixed assets.” Fixed assets are any property, plant infrastructure, and equipment that you own to use for your business.

This isn’t always the case, though. For example, businesses conducted online and solely providing services. In these instances, the only fixed asset tends to be a computer or laptop, so the accounts receivable may well be the largest asset. However, there are other assets to take into consideration, such as intellectual property, deferred charges, and purchased goodwill. These can all affect the value of each other.

In conclusion, the biggest asset is dependent on the type of business, but a smaller business is more likely to have accounts receivable as its largest asset.

Benefits of Accounts Receivable for a Small Business?

If you want to grow and expand your business, you will need to get to grips with accounts receivable. The benefits are numerous and will only work to serve your business in a positive way. 

Accounts receivable can:

  • Produce much-needed funding for business improvements.
  • Support your business growth and development.
  • Makes collections easy and straightforward.
  • Helps build your credit extensions.

Best Practices for Accounts Receivable Management in a Small Business

A structured and organized approach to accounts receivable is required to be successful. 

  • Take the time initially to get all your processes right
  • Develop and maintain your documentation
  • Be clear about your repayment terms
  • Keep all your databases and customer information up to date
  • Offer incentives to settle via early repayment discounts or the ability to pay through installments
  • Keep a trial balance where you can see which debtors are overdue or have outstanding payments. Establish a process that reminds debtors to pay
  • Use a dedicated accounts receivable software program to keep your records
  • Outsource the task to an accounts receivable company

How to Establish an Accounts Receivable System in Your Small Business?

There are several essential stages to establishing an effective accounts receivable system. Once it’s set up, it should run smoothly. However, it’s important not to rush the initial planning stages. Cutting corners will only result in confusion and errors.

  1. Develop your collection plan, including repayment terms and conditions. 
  2. Create an invoice template.
  3. Develop a way to document your collection process so everyone can view and understand it.
  4. Scan and keep records of all receipts, requests, and orders.
  5. Determine your incentive plan for early repayments. For example, a larger discount for paying upfront.
  6. Take the time to explain repayment processes to your clients. Assist them as far as you can and strengthen those relationships.
  7. Have a structured approach to chasing late or missed payments.

What Strategies Can You Use to Improve Accounts Receivable?

  • Automate invoicing and payments via dedicated software.
  • Keep the human element by personalizing communication and being easily reachable on the phone or email (don’t automate this part).
  • Train your team on the importance of accounts receivable, what it is, and how much it can benefit the business.
  • Develop a collection strategy tailored to your various customers or clients.
  • Outsource accounts receivable to a qualified accountant.

How to Hire an Accountant to Help Manage your Accounts Receivable?

Most small business owners balk at the thought of hiring an account manager. A full-time accountant is expensive, plus you have to find the office space to accommodate them.

However, virtual accounts receivable management solutions can make it easy and inexpensive to get the professional assistance you need. EvolveCFO is one such virtual accounts receivable company. This company offers you access to a team of qualified accountants when you need them. That way, you get the help you need without having to hire someone. It’s the perfect solution for small businesses.

How Do I Know it's Time to Hire an Accounts Receivable Specialist?

It’s high time you hired an accountant if you are experiencing the following:

  • Sudden business growth or expansion.
  • The inability to find the time to perform the tasks yourself.
  • when you have an unmanageable amount of unpaid invoices and bills to chase.
  • When you want to free up extra time to concentrate on growing your business.

What Skills to Look for in a Specialist?

There is a multitude of accounts receivable companies out there to choose from. However, ensure you select one that has genuine credentials. 

For example, EvolveCFO specializes in providing accounting services to small businesses and startups. We also use cloud-based software and an accounts receivable monitoring system so you can access your accounts anytime, anywhere. Best of all, we will assign a dedicated account manager to assist you.

What is the Cost of Hiring an Accounts Receivable Specialist?

The cost of hiring an accounts receivable specialist is probably not as much as you think if you go with EvolveCFO. We have three different pricing tiers, giving you access to a whole host of accounting services, including accounts receivable. As you scale your business, you can upgrade your payment plan to reflect the additional support you’ll need. Additionally, a whole host of add-ons are offered so you can tailor your plan to suit your business.

Finally, EvolveCFO doesn’t lock you into a contract like many of our competitors do. You simply pay month by month. We make sure that it is simple to cancel at anytime. So, if your circumstances or needs change, our company can provide more help or you can cancel whenever you like.

Conclusion

To understand more about the benefits of accounts receivable and other accounting services from EvolveCFO, please get in touch. Our friendly team is looking forward to talking with you.

If you’re not on top of your accounts receivable, now is the time to get started. It’s the key to unlocking your business’s potential and helping you scale to new heights. We’re here to help. Once your accounts and accounts receivable are in order, you won’t look back.