Proper cash flow management is crucial in every organization, and one of the best ways to ensure good cash flow is to implement a smooth and efficient process for handling accounts receivable. The key is to take a proactive approach—to recognize potential problems before they arise, and solve delinquencies before they require professional collections. The first step is to implement weekly and monthly aged receivable reporting. Aged receivable reporting should include when and how much the client was billed and should be provided to the project manager or relationship manager assigned to the account. Accounts receivable should not just be in the realm of the accounting department; the project manager or relationship manager who oversees an account and has a relationship with the client should be involved as well. It is essential to have open communication among the project team, accounting, and management to ensure all potential account risks are identified and a plan is made to resolve issues as they occur. Organizations should also have a clear credit policy and enforce that policy with a credit committee. Who sits on this committee may vary from one company to another, but it should be a high-level group—for example, the president, the CFO, and the controller. A credit committee will maintain a big-picture perspective when enforcing a company’s credit policy. Their involvement should be after accounting and the project leaders have determined why a client is late in making payment. Was there a service issue? Was there a billing issue? The credit committee’s presence will help the project leader maintain their relationship with the client without turning the decision making over to the accounting department.The credit committee should have the authority to either approve continuing work or cut off services until all accounts are paid. Another way to prevent accounts receivable problems is to know who you are doing business with. According to Accounting Today, it’s important to differentiate bad debts from sound clients: “Among the red flags are payments by post-dated checks, or constantly late payments, or both; frequent changes in management; low levels of liquidity; and a frequent change of banks.” If your company is engaged in business-to-business sales—such as selling furniture or paper to other businesses—it’s smart to do a credit check or run a Dun & Bradstreet report before entering a business relationship with a new client. Set a credit limit for each client, and stick to that amount. If your company is selling small-dollar items to consumers—such as making T-shirts or printing brochures—it may make sense to take payments by credit cards or cash-on-delivery only. Finally, make sure to report any problems that you’ve had with clients to credit agencies. This helps your company—and others—identify companies and people who don’t pay before you decide to do business with them.
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