Many businesses experience difficulties with their accounts payable and accounts receivable. These can sometimes lead to serious issues that can affect the health of the business.

However, if you experience problems with these in your business, there are a number of practices that you can put into place to prevent issues from arising.

Accounts Payable and Receivable: What’s the Difference?

Accounts receivable refers to money that you are owed (the funds coming in), while accounts payable refers to money that you owe (the funds going out).

So accounts receivable would include money that customers and clients owe you, like when you invoice a client and are waiting for payment. This is recorded as an asset, so it is money that your business is generating. Accounts payable is what you owe, and it is recorded as a liability.

The aim for businesses is to have a higher accounts receivable than accounts payable, so more money is coming in than going out. This is called working capital, and a successful business will have a positive net working capital.

Despite being fairly straightforward, these often cause complications. So how can you reduce problems? Here are a few tips.

Encourage Early Payment with Incentives

One of the best things that you can do in your business to speed up the invoicing process is to encourage customers to pay up quickly by offering them incentives for paying early.

This often comes in the form of a discount for early payment. For example, while you may have a standard payment term of 30 days, offer a discount if payment arrives in 15 days.

Discourage Late Payment

Just as you encourage early payment using an incentive, you can also discourage late payment by adding fees for those clients who do not pay in the required amount of time.

That way you may be able to encourage more customers to pay up sooner to avoid extra costs.

Simplify the Payment Process

One of the easiest steps you can take is to make the payment process as simple as possible. That means deciding on a suitable time frame for your customer and allowing them to choose from a range of payment options so that they can use the most convenient option for them. If making the payment is a hassle, they are far more likely to put it off.

Use an Invoicing System

Make sure you have a good invoicing system in place, which could also use an electronic or online invoicing system. These are often much quicker and more convenient than sending paper invoices, saving you time to focus on other tasks and allowing you to keep on top of your payments with greater ease.

Follow Up with Late Payments

As soon as a payment is late, make sure you follow up with it and don’t set it aside for later. By informing a customer that they are late the day their invoice becomes overdue, you will be showing them that you are not the sort of business to forget about this.

Set up an automatic email reminder and then call them on the phone. If a customer constantly pays late, you may want to consider whether you want to work with them.

Use a Factoring Service

Using a factoring service may be a good option. This is where a company will buy your accounts receivable from you and pay you in cash, and that company will then collect the money from your client.

You don’t have to worry about late payment, and it’s a great way to get your hands on the cash quickly without wasting time chasing up late payments.

You can find a factoring company using a directory like Look at the rate that the company will pay you, as well as their reputation, to choose the most suitable.

Automate Your Payments

As well as making sure you are paid on time, you will also want to make sure that you pay your invoices quickly. This leads to better business relationships, and you may be able to get a discount by paying early.

Automated payments are a good option. These are less hassle for you as well as being better for your suppliers.

Negotiate Discounts

You should also consider asking your suppliers for discounts for paying your invoices early. They may be more than happy to provide you with a discount, but you may have to ask to find out.

Avoid Problems with Accounts Payable and Receivable

These are a few of the steps that you can take to avoid experiencing problems when it comes to accounts payable and receivable. Failing to manage your accounts properly can lead to serious problems for your business, so make sure you have good systems in place to prevent these problems from occurring.

Francesca Nixon is an accountant who works from home helping small business owners manage their accounts when it comes to tax time. She writes articles advising on the best practises for managing finances and files.