Your Small Business - Accounts Receivable

Your Small Business & Your Accounts Receivable

You are off and running with your own small business. Maybe you're a one-man-show, running your Cosmetics, Construction, or Personal Trainer business out of your home office. Maybe you're a little larger, with a small office and under 12 employees.

You have an expertise, a talent, a handle on a market need. You have at least some business sense, and you may even pay an accountant to do the bigger tasks.

But what about your accounts receivable? What do you really need to know?

There are three basic functions involved in collecting monies due:

  • Credit
  • AR
  • Collections

If the credit function is done correctly, and the AR function is monitored closely, very little will actually wind up in collections. You do not need to lose hard earned money to an outside factoring company. You do not need to hire a collection agency.

Let's begin with the most basic initial step: The Credit Application.

Your first step in setting up a customer with open terms, is the credit application. This need only be a one paged document that will serve as a trade contract if necessary, give you a reasonable amount of reference material to work with, and supply you with all the details of the company you'll need.

Yes, you really do need a credit application filled out by every customer you have applying for open terms. It doesn't matter if you've known the customer forever. It doesn't matter if the customer is a huge well known corporation. Any company, large or small, your friend or not, can go through a variety of situations that will directly impact your ability to get paid. Just ask Menu Foods, Enron, any company whose CEO was on vacation in Sri Lanka on December 26, 2004, or every company operating in New Orleans on August 29, 2005. I don't even want to go into all the companies affected directly or peripherally by the events of September 11th, 2001. Absolutely any company can be faced with natural disasters, crimes, accidents, government recalls, terrorism, scandals, hostile take-overs and more. Additionally, small companies can be severely affected by family crisis, illness, or death.

If you do a lot of business on a handshake and you think an associate will be rubbed wrong if you suddenly ask for the credit app to be filled out and signed, then put the rub on someone else. Tell him it's your new accountant is requiring this, or that you're required to have this info on file. But be firm, and get that application. If you have to, stop shipping the customer until the paperwork is taken care of.

The application needs to gather information regarding the customer. Obviously, their name, any DBA's, parent companies or divisions, mailing address, other operating addresses, phone fax email website, federal ID number, a duns number if they have it, and contact information.

Be sure to get in writing on your application any specific payment requirements from the company. For example, some companies or government branches require their PO number on your invoice, or a certain voucher to accompany your bill. Some places are paperless and will only accept electronic invoicing, or invoices submitted through their websites. Get this information in writing before you are behind on your receivables.

Request a bank reference and at least 3 trade references. Require that their bank reference include their account number(s). Require a phone, fax and/or email, and mailing address for each reference.

Some references will not supply you with information unless they are sure their customer has agreed to let you check their credit. Therefore, having the application signed is important. All you need is a small statement that says:

I am an authorized signor for this company, and grant permission for (your company) to acquire credit information from the above sources to open my account, and to maintain my account in the future.

Try to make sure that the signor of the credit application is the signor on their bank account as well. You do not need a "hard" signature; a fax or scanned email copy of the signed document is fine.

Once you have the signed completed credit application back, you are ready to evaluate the customer for a potential credit line, so that they can purchase on open terms.

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All text is original content by Veronica.

All photos are used with permission.

All videos are used courtesy of Youtube.

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5 comments

Charlie 9 years ago

I wasn't expecting to find good business advice like this here, but this is really good. I do alot of that handshake business. And I know I can trust the people I shake hands with. But you're totally right. What if something unforseen happened, like a flood or fire. I have to protect myself. I never thought about this before. You should write more of these types of articles.


Veronica profile image

Veronica 9 years ago from NY Author

Thanks Charlie. I have a great deal of experience in the credit function, accounts receivable, and collections. Please feel free to ask me any questions, specific or general.


Small Business Guy 8 years ago

Good business financing advice. Thanks, it is kind of something you don't think about when you're doing business with a trusted friend/company.


Transportation Collection Agency 6 years ago

Wonderful post with a lot of useful tips. I thank you for the information.


Veronica profile image

Veronica 6 years ago from NY Author

Thanks Transportation Collection Agency!

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