Want to get a better handle on your business’ cashflow? Here are the basics of invoicing and accounts receivable for the non-accountant (and newbie bookkeeper).
I see it all the time. New business owners want to get paid so desperately that they don’t set up a proper invoicing and income tracking system… namely “accounts receivable”.
Even if you have a “cash basis”** type business, it may be smart(er) for you set up a somewhat modified “accrual basis”** system.
Basically, take elements from both systems and smush them together.
How I do that and advise my clients to do that is to invoice clients (even if it’s a cash transaction, this is accounts receivable) and document what you owe (this is accounts payable – we’ll discuss this in a separate post).
Accounts Receivable 101
For now, let’s focus on Accounts Receivable… aka what customers/clients owe you for products and services you have provided or are scheduled to provide to them.
Why it’s important to monitor
It’s important to monitor what your customers/clients owe you.
A lot of us just invoice via PayPal or use a button on our websites and wait for the money to be deposited to our bank accounts.
The problem with doing it this way is that it’s very reactive. It is not a proactive way to monitor your income and growth.
Doing it this way, you may literally be leaving money on the table (because you’re not always aware of money that is due from a customer).
What to do
So what should you do instead?
Create an invoice for every transaction and apply the payment to the open invoice. (It’s easier than it sounds).
How to do it
If you have any accounting software worth anything… you should be able to create invoices and either email them or mail them to your customer.
Or if you are using PayPal or Stripe, you can use something like Zapier to automatically generate invoices in your accounting system for you.
The only difference in these two is the point of origin.
In the first example, the invoice originates in the accounting system (with you allowing payment via PayPal or Stripe or some other integrated payment system).
In the second example, the payment originates with the payment system with a push (or zap) to the accounting system creating the invoice.
How to do it… more detail
How you implement this will depend on your setup.
You may be like me and use a mixture of both.
Some of the goods and services offered on this site originate by me creating an invoice in Xero…
While others are originated by someone pressing a button on the site, which then goes directly to the payment processor (first) then zapped to Xero to create the invoice.
When you receive the payment from your customer, instead of allocating it an income account… you would apply the payment to the open invoice (thereby “closing” the invoice).
What to look for
Once you have this setup and grooving like a well oiled machine, what next?
What should you be on the lookout for?
That depends on if it’s a one time purchase or if it’s a recurring purchase.
For one time purchases, for instance, a training program…you shouldn’t have open balances unless there was a problem with the processing of the payment.
For recurring purchases, for instance, services that are offered on a monthly retainer or coaching programs offered with a monthly payment program… you may find “outstanding invoices”. <<This is what you really need this system for!
What to do
There can be all sorts of reasons why there are outstanding invoices, the most common being that the expiration date of the credit card (or debit card) has passed and needs to be updated. Or your customer simply forgot.
Once you know that you have outstanding invoices, follow up with your customers & clients.
Send them a reminder. Most online/cloud based accounting software have “statements” that you can email them as a quick note. In Xero, you can actually automate this to send your clients as many reminders as you want. You could send them daily…
If they don’t respond, and you don’t have a lot of them, give your customer a call to check in and check on them about their outstanding invoice(s).
If you have a few, you may consider having your bookkeeper follow up (if you have one) or look into using a collections services.
So my question for you, are you using accounts receivable in your business?
Do you have some sort of system in place to alert you when you’ve “left money on the table”? If not, what are you waiting for?
If you don’t have a system and need some help implementing this…you can shoot me an email, leave a comment below or schedule a quick consultation.
Until next time,
Editor’s Note – This post was originally written & posted April 2014. I’ve revamped it to include a little more detail about what to look for.
Cash Basis – in accounting terms, you recognize (record) income and expense as the money literally comes in or goes out of your bank account(s).
Accrual Basis – in accounting terms, you recognize (record) income and expenses when they are owed. In this case, you record income via an invoice (the customer owes you money for goods or services) and you record expenses via a bill received from your vendor (you owe them money for goods or services).
With true accrual basis accounting, in addition to documenting A/R and A/P, you would also document and reallocate income and expenses to the proper accounting period using journal entries. Other journal entries you might make using this method of accounting would include depreciation and amortization.
Modified Cash Basis or Modified Accrual Basis – in accounting terms, it’s taking elements of both cash basis and accrual basis. Using this method, one may start with cash basis but add accounts receivable or accounts payable (or both) but stop short of doing quarterly or annual adjusting journal entries.