In theory, it might seem like a company with high accounts receivable numbers are in a good position. The reality is that isn’t necessarily the case. The cash that’s attributed to accounts receivable — while legally enforceable for payment — is more like credit, and credit isn’t tangible money for a business just yet.

Although accounts receivable are considered assets on a balance sheet, the money held up in your accounts receivable has yet to be paid by the customer. The promise of too much cash could be bad for business for a few reasons. To start, when customers run into their own financial hardships, they may look to delay payment to their vendors. This is particularly true during periods of high inflation when the cost of goods and services tends to rise in general. This impacts how quickly your accounts receivable becomes actual cash. In fact, small and medium-sized businesses admit that about 11% of their invoices are paid after the due date[1].  

Keeping your accounts receivable high can also lead to a severe cash crunch, unnecessary financing costs when you don’t have enough cash-in-hand to cover expenses, or, in worst-case scenarios, it may cause businesses to close completely if too much of their cash is held up in accounts receivable.  

If you find that your business is often struggling for cash, despite keeping a relatively high accounts receivable balance, it may be time to re-examine your invoicing and payment processes and institute systems that keep your cash flow… well … flowing.   

Make it Automatic 

Digitizing your business can help in several areas, and getting paid is one of them. According to one survey, 52% of finance and business services leaders agreed strongly that digitizing their accounts receivable would be essential to elevating their company[2]. Although it requires an initial boost in money and manpower, diverting some of your resources towards digitizing your AR can free up time in the future and reduce or eliminate repeated challenges.  

Automating your AR may lead to a bump in customer happiness, as well: 35% of businesses say issues with customer communication is their largest challenge when it comes to collecting money, and 85% of C-level executives listed bad communication between consumers and AR as a problem leading to nonpayment[3].  

Before diving into digital, take stock of your current AR process to uncover your main challenges. Businesses typically see problems involving a lack of invoicing transparency, failure to send invoices or reminders on time, and poor communication about expectations. Using an automated platform can reduce human error, remove guesswork, and make things more streamlined for both sides.

Incentivize Early/On-Time Payments

Automation can help make the process of invoicing and receiving money easier, but if you’re looking for additional ways to entice your clients to pay on time or early, offering incentives is one way to do that.

One common incentive includes discounts for early payments. If you’re going this route, do your research first so any discount you offer isn’t going to undercut your payment by too much. This could become especially detrimental if too many customers take you up on the offer. One survey found that small and medium-sized businesses (SMBs) on average offer discounts of 4.1% for early payments, and up to 4.8% for clients with longer payment terms of 30 days[4]. These discounts add up quickly, so run the numbers and figure out what’s fiscally feasible before making any offers.  

If that fails — or it turns out it isn’t fiscally feasible — instituting a late fee for delayed payments is another way to get customers to come around to making payments more quickly.  

Negotiate First, Then Get Serious 

You want happy customers, and working with them in a professional manner should always be your initial move. If you’ve tried that route and you still can’t get clients to pay, though, it’s time to get serious.  

Sending a delinquent account to a collections agency is a big decision that should be taken seriously and only after every other attempt has been made — including seeking an alternative payment plan that works for both parties — to receive payment. Most small businesses wait until payment is 90 to 120 days past due before sending it to a debt collection agency. The agency then usually charges between 20% and 50%[5] of what they recover, but in this case, some money is better than none.  

It’s important to check back on your invoicing and accounts receivable processes frequently to ensure they’re working for you and to make any necessary adjustments. Having a lot of customers is great, but what pays the bills is cash-in-hand.

Learn more about common cash flow issues small businesses should avoid.