How to Manage Accounts Receivable: Tips and Best Practices
The time between finishing a job and the moment your customer pays can be stressful—especially not knowing whether a first-time customer will pay their invoice on time.
This outstanding amount owed to your business is known as accounts receivable, and it’s important to know how to manage it.
With a plan for your accounts receivable process, you’ll strengthen your cash flow. Without one, you may struggle to pay for expenses like materials or labor.
Keep reading to learn how to manage accounts receivable and why it’s the key to a successful home service business.
Disclaimer: This content is for informational purposes only and shouldn’t be considered legal advice or a substitute for obtaining such advice specific to your business.
What is accounts receivable management?
Accounts receivable is the money your customers owe your business—typically in the form of outstanding invoices.
Accounts receivable management (also known as AR or A/R management) are the policies and procedures you use to manage outstanding balances or non-payments. An accounts receivable management system may include:
- Billing and invoicing
- Payment processing
- Communications with customers
- Accounts receivable collections strategies
Essentially, accounts receivable management is a process to make sure your customers pay their invoices, no matter what.
Why is accounts receivable management important?
Accounts receivable management is crucial to maintain your cash flow and protect your business. This allows you to pay your employees, purchase supplies, tools, and other assets, and reinvest in your business.
There’s a lot that can go wrong when you don’t know how to manage accounts receivable processes. You may end up unable to make payroll or pay your vendors late. In the worst of circumstances, you could go out of business.
Five tips for effective accounts receivable management
Knowing how to manage accounts receivable can help you deal with customers who won’t pay for services in a timely manner and limit financial risks for your business.
Better yet, it can lead to healthy cash flow and greater profitability for your business.
Here are five tips to better manage your account receivables process.
1. Put job payment terms in writing
Figuring out how to manage accounts receivable for your business starts with deciding on your payment terms, then making sure that those terms are documented and agreed to by your client.
Include a detailed description of your payment terms on your service contracts, quote templates, and invoices. This could include any required deposits, late fees for overdue payments, or even discount incentives for quick payments.
Make sure to always walk your customer through the agreement to make sure they understand and ask them to sign off on it.
2. Send an itemized invoice for transparency
Creating a professional invoice requires more than simply including the outstanding payment. The best invoices are clear, concise, and answer these three questions:
- What is your customer paying for?
- When is the payment due?
- How can they pay their outstanding balance?
For transparency, include an itemized service and product list that provides clients with a detailed description of the services (including service dates), and the cost of each line item. This helps to avoid confusion or disputes when it comes time to collect payment for your services.
Make sure to customize your invoices with your company branding, contact information, and detailed payment terms and conditions.
READ MORE: What to include on an invoice: must-haves to get paid
3. Keep track of unpaid invoices
This tip may seem obvious, but it is easier than you think to lose track of your invoices and payment collection, especially if you don’t have proper processes in place. Letting a payment become past due will negatively affect your cash flow.
For the best cash flow management, you should pay close attention to when your invoices are sent and their due dates. You should be contacting customers on the first day payment is late to minimize cash flow disruption and to get paid as soon as possible.
The longer you wait, the more difficult it may be to collect payment.
The good news is that you don’t have to continuously update an Excel sheet to keep up with your invoices.
Check the status of all your invoices at a glance with Jobber’s invoice tracking. You’ll see which invoices have been sent, what payments are outstanding, and which jobs still need to be invoiced, so nothing slips through the cracks.
4. Think twice about whether to extend credit to customers
There are several reasons why you might consider extending credit to customers:
- Build trust and loyalty with your customers
- Provide a competitive advantage in the market
- Attract more customer and increase sales
However, you should be cautious with who you extend credit to. As a small business, you have no way of knowing the bad debts your client may have. Determining whether credit should be extended to a client may take a bit of leg work.
Learning how to manage accounts receivable issues means knowing how to have tough conversations with your customers. If a customer asks for credit, politely ask what is holding them back from making a payment. From there, use your best judgment and make the decision on a case-by-case basis.
If you decide to extend credit to your customers, make sure to have a clear credit policy to protect your business. It should include:
- Credit terms, including how much credit is extended and when payment is due
- The collection process for past due invoices
- Penalties for late payments
5. Follow up with an automated invoice reminder
When it comes to learning how to manage accounts receivable, communication is key. This is especially important when it comes to invoicing.
Your customers are busy people and sometimes they just forget they have an invoice waiting to be paid. Sending an automated overdue payment reminder is a gentle reminder they need to make a payment.
Pro Tip: Manual reminders can take up a lot of time and are difficult to track with multiple invoices on the go. Use Jobber’s automated follow-ups to send payment reminder letters to customers with outstanding invoices to save time and get paid sooner.
Best practices for accounts receivable management
You now know how to manage accounts receivable processes effectively, but implementing a few best practices will take you that extra mile.
Send electronic invoices
The manual process of handwritten invoices is unprofessional and hard to read, but worst of all they’re impossible to track. Thankfully, invoicing software makes it easier to keep your accounts receivable process organized.
With Jobber’s invoicing software, you can get paid faster and impress your customers.
Once you complete a service, an electronic invoice is automatically generated using the line items on the job. This makes it quick and easy to send professional and itemized invoices to your clients.
Keep customer info organized with a CRM
Understanding how to manage accounts receivable means knowing what tools to use, and one of the best tools to have in your kit is a CRM.
Use a field service CRM to keep client info organized and at your fingertips. This will help you better manage your accounts receivable process and store any documentation you may need down the road—all in one place.
With Jobber’s CRM, it’s easy to track all of your customer details, including:
- All emails, texts, and letters
- Quotes and invoices
- Completed jobs
- Payment reminders and follow-up messages
- On-my-way text messages
- Images and checklists from a job
READ MORE: 10 best CRM apps for small business success
Make payments easy for your customers
The easier it is for your customers to pay you, the quicker you’ll get paid. Provide several payment options to ensure the best customer service.
Accepting cash, checks, credit cards, as well as online payments like bank transfers (or ACH payments) will allow your customers to pay in a way that’s most convenient for them.
Jobber’s Online Payments software helps you automate your accounts receivable process. Simply ask your clients to save a card on file and get paid automatically when the job is complete.
Pro Tip: Send customized payment links through Jobber that let your clients click-to-pay as soon as they receive the invoice.
Pick up the phone
Knowing how to manage accounts receivable means knowing when to pick up the phone. If your automated emails or text message follow-ups are going unanswered, the natural next step is a phone call.
Use the call to remind your client about the services you completed and the overdue invoice. This may feel uncomfortable at first.
For best results, be friendly, keep a non-accusatory tone, and give your client the opportunity to bring up anything that may be holding them back from making a payment.
Track your accounts receivable performance
Tracking a few key metrics will help you identify any room for improvement within your accounts receivable process.
Track your accounts receivable performance
Tracking a few key metrics will help you figure out how to manage accounts receivable in a way that works for your business.
Here are a few metrics you should be monitoring:
- Average accounts receivable – Your average accounts receivable is the average amount customers owe for services during a given reporting period. Use this formula to calculate your average accounts receivable:
Average accounts receivable = Total AR balances for reporting period / Total number of months in the reporting period
- Accounts receivable turnover ratio – This number measures how quickly your accounts receivable is collected and ultimately how effective your AR process is. To calculate your accounts receivable turnover ratio use this formula:
Accounts receivable turnover = Net credit sales / Average accounts receivable
- Accounts payable (AP) – Your accounts payable cover all the amounts due to vendors or suppliers. For example, equipment purchases or repairs, subcontractors, and phone bills. Monitoring your AP can help you track your business’s spending and financial health.
- Working capital – Your working capital is the money you have to use in your business’s operations, once you subtract your accounts payable. Positive working capital gives you the flexibility to grow your business.
Get your whole team involved
The most successful accounts receivables management processes involve the whole team.
Your whole team should know how to manage accounts receivable processes to some extent. Whether you’re the business owner, a technician, or an accountant, you have an important role to play in monitoring account balances and collecting receivables.
For example, field service technicians can use Jobber’s mobile app to close jobs and send invoices right from the job site. And with payment processing, you can accept debit or credit card payments from anywhere.
Automate your account receivable process with Jobber
Knowing how to manage accounts receivable is essential for your small business. The right tools can help you improve your processes with minimal effort.
With professional invoices, automated follow-ups, and easy, one-click payment options, Jobber has the features you need to create a winning accounts receivable process to grow your bottom line.
Originally published in July 2020. Last updated on October 28, 2024.