When running a business, you’re likely juggling many responsibilities throughout the day as you try to boost sales and grow your brand. One way to promote sales is by offering your customers flexibility in their payment methods. Common ways include allowing them to pay via credit cards, mobile payments, or allowing them to pay you back later for a product you’ve already provided them.
As you’ve probably experienced, this often leads to confusion and scrambling while trying to track who yet owes you money. The best way to track it’s through your accounts receivable (A/R).
Key takeaways:
- Accounts receivable differs from accounts payable (A/P)
- Accounts receivable is where your business’s cash flow is measured.
- You should set up a solid accounts receivable process early in your business’ life
What Is Accounts Receivable?
Accounts receivable is the amount that a customer is yet to pay you for a product or service that they have purchased through credit. The time until you receive the payment depends on the credit period, ranging from a couple of days to a year.
It’s documented through outstanding invoices that you (the seller) are responsible for issuing to the customer. This unpaid invoice describes the nature of goods, the total amount the customer owes you, and the due date for the payment. Since customers are legally obligated to pay you by the due date, accounts receivable are considered an asset on your balance sheet.
How Is A/R Different From Accounts Payable?
While accounts receivable are a current asset for your business, accounts payable are a liability. Accounts payable is the amount that your company owes to a supplier as opposed to the amount that customers owe you.
Let’s say you buy raw materials from a supplier (Company Y) for your e-commerce business using credit. The amount you agreed to pay Company Y at a later date is considered your accounts payable (since you owe money). In contrast, for Company Y, this amount is counted as their accounts receivable (since they are owed money).
How Does A/R Affect Your E-Commerce Business?
Accounts receivable is the soul of your business’s cash flow. Having an accounts receivable balance indicates that a portion of your revenue hasn’t been received as a cash payment yet. If you aren’t consistent with collecting payments from customers, you could face a significant cash crunch that would adversely affect your company’s liquidity.
Staying on top of your accounts payable invoices is relatively easy since your vendors are required to be paid by a specific date. You should set similar standards when collecting your accounts receivable.
Typically, businesses operate on a net 30 basis, which means customers are expected to pay their dues within 30 days of receiving an invoice. You must ensure that your customers are paying you on time so that you can subsequently pay your bills. Ensuring you’re receiving your revenue on time also ensures you have enough cash to fund growth and pay back debt.
As your business grows, it’s easy to make mistakes handling your accounts. Small mistakes can compound quickly, causing major issues down the road. Additionally, it may be tougher for e-commerce businesses to collect accounts receivable since all your sales take place online and you aren’t dealing with customers in person. However, if you have a solid strategy in place, you can avoid payment irregularities and maintain a positive cash flow.
What Are Examples of Accounts Receivable
Most online shops allow at least part of their sales to be completed on credit. This enables customers to quickly purchase your products without immediately having to pay the full amount. It also builds customer loyalty since customers feel trusted and valued.
Some examples of accounts receivable include:
- An online cosmetics company that allows customers to purchase products and pay in monthly installments
- An education website that bills students at the end of every month instead of after every class
- An online supplier of plastic containers and cutlery that bills restaurants at the end of every three months instead of after every shipment
How To Manage Accounts Receivable?
We’ve seen why effective accounts receivable management is important. But what strategies can you implement to ensure effectiveness?
We’ve listed some of the best solutions to help you maintain a low accounts receivable balance:
Establish a Robust Internal System?
Create a process for handling accounts receivable and stick to it religiously. Sending out invoices is the seller’s responsibility, so set a day in the week when you create and send out all invoices. The sooner you invoice your customers, the faster you’re likely to be paid. We recommend sending invoices with delivery, so customers immediately have all the required information to prepare for payment.
You could pick a different day to contact customers to remind them of upcoming payments or inform them of defaulted payments.
Follow Up and Ask for Payment
Just sending out initial invoices doesn’t guarantee that you receive payments on time. Include a system for following up with customers when due dates are approaching. You shouldn’t feel guilty and hesitate when following up about upcoming or overdue invoices. On the contrary, your customers might even appreciate the reminder.
You can encourage on-time payments by charging interest or a late fee for customers who regularly default on credit terms. Meanwhile, discounts and other benefits are great incentives for customers who pay you on time or even before the due date. This could even boost the customer experience and sales.
Set Clear Payment Terms
Be clear about your payment processes from the get-go. The initial terms you set anchor your customer’s expectations and behaviors, so be as transparent as possible. For example, include details about how purchasing on credit works, when to expect an invoice and follow-ups, and the different credit periods you offer. This can reduce confusion and conflict at the time of payment. You can also use the initial terms and conditions to establish penalties and late fees.
Send Detailed Invoices
Like your terms and conditions, make sure that your invoices provide detailed and clear information for your customers. Avoid sending generic invoices that simply state the amount due. Instead, your invoice should present a breakdown of the products and services you provided, the amount for each, the total amount owed, and the due date for the payment. This reduces the likelihood of any delays.
It’s good practice to maintain a copy of the invoice in addition to sending one to your customer.
Provide Multiple Payment Options
Customers may have personal preferences regarding how they would send payments. For example, they may prefer to pay through credit or debit cards, bank deposits, or send a wire transfer to your business when the payment is due. Either way, you should clearly mention the different payment methods you accept, even for purchases made on credit.
Cash usually isn’t the most practical option for e-commerce companies when dealing with accounts receivables.
Be Wary of Suspicious Accounts
One of the biggest risks with accounts receivable for e-commerce businesses is that customers are online users who often use a guest account to check out purchases from your website. This increases the chances of fraud.
One way to manage this could be through registering an allowance for doubtful accounts, which shows that you anticipate that you may not receive some balance payments. This reduces accounts receivable and writes off account balances that you failed to collect due to fraud or scammers.
Another precautionary step could be asking customers to fill in their credit card or bank account details while making the purchase but charging them only at the end of the credit period. You should only accept their transaction once their account number and related information check out. This way, you have some leverage over them, and there’s little to no chance of payments defaulting.
Use Accounting Software
The entire process of creating and sending invoices, confirming their receipt, and following up, can be pretty time-consuming. Not to mention finally computing your accounts receivable and payable.
Consider automating the process by using accounting software to record transactions and track your accounts receivable and payable. Most software provides an organized, user-friendly interface that simplifies the process. You can also integrate them into your e-commerce website for a seamless experience for you and your customers
What Are Your Next Steps as an E-Commerce Business Owner?
Accounts receivable are an integral part of your cash flow cycle. It’s important to have a solid accounts receivable management strategy in place to stay on top of your company’s accounts and ensure you receive payments on all your sales.
We recommend being transparent with your customers regarding all payment expectations and related terms and conditions. You should also consider hiring experts to help you track your company’s transactions or automate the process using accounting software that you can easily integrate into your online platform.
We understand that navigating all aspects of your online business can be overwhelming, so we compiled some great accounting tips for you. You can also check out our resources on everything you need to know about e-commerce for more information on running a successful online business.