Chapter 10 — Accounts Receivable and Payable, Done Right

Chapter 10 — Accounts Receivable and Payable, Done Right

Receivables and payables are the two sides of business credit: money owed to you and money owed by you. Managed well, they’re a quiet engine of cash flow. Managed poorly, they’re where profitable businesses go to die — starved of cash while waiting on customers, or blindsided by bills they forgot were coming.

Accounts receivable: your money, in someone else’s pocket

Every unpaid invoice is an interest-free loan you’ve extended to a customer. Every day it sits unpaid past its terms is a day your cash is working for someone else.

The aging report is your command center. It sorts every unpaid invoice by how overdue it is: current, 1–30 days past due, 31–60, 61–90, and over 90. Run it weekly. A healthy AR has most invoices in “current” with a thin tail of late ones. An invoice sliding from 30 to 60 to 90 days needs attention now, not at 120 days when it becomes a write-off.

The collections routine. Chasing payment feels awkward; not getting paid feels worse. Make it a system, not a confrontation:

• Day 1 past due: a friendly automated reminder — “just checking this didn’t slip through the cracks.” Most late payments are forgetfulness.
• 15–30 days past due: a personal call or email. Confirm they received the invoice, ask when payment will go out, get a specific date.
• 45–60 days past due: a firm written notice stating the amount, the overdue period, and next steps (late fees, paused service, collections referral).
• 90+ days: decide — collections agency, small claims court, or write it off. Hope is not a collections strategy.

Two policies prevent most AR pain: check new customers’ credit before extending terms (even a quick reference check beats nothing), and set credit limits — a new customer doesn’t get $20,000 in terms on the first order. When an invoice becomes uncollectible, record it honestly: debit Bad Debt Expense, credit Accounts Receivable. Writing it off isn’t giving up — it’s telling the truth, and it’s usually tax-deductible.

Accounts payable: your vendors’ money, in your pocket

The mirror image: every unpaid bill is an interest-free loan your vendors extend to you. The goal isn’t to pay late — it’s to pay on time, on terms, capturing every discount and preserving every relationship.

The AP aging report sorts what you owe by due date: due this week, due in 30 days, overdue. Review it in your weekly bill-pay session. Overdue payables are emergencies — late fees, damaged supplier credit, accounts put on hold right when you need materials.

Know your critical vendors — the ones whose disruption would stop your work. They get paid first and never get surprised. Negotiate terms when you’re strong, not desperate: a vendor who trusts your payment history will often extend Net 45 or offer a discount for early payment. And keep W-9s on file for every vendor you pay for services, before the first payment — chasing W-9s in January is a miserable annual ritual you can avoid, and you’ll need them for 1099 reporting (Chapter 13).

Cash-flow timing: the art of the float

Cash flow is about timing, not just amounts. A business can be profitable on paper and still miss payroll if $30,000 of receivables arrive on the 30th and $28,000 of payables are due on the 15th.

Accelerate inflows: invoice immediately, offer early-payment discounts, follow the collections routine, accept electronic payments. Manage outflows deliberately: pay on terms (not early without a discount, not late ever), schedule large payments around known inflows, and keep a cash cushion. A useful target: one to two months of operating expenses in reserve — your shock absorber for the late-paying customer, the slow season, or the broken equipment.

Forecast simply: a rolling 4–6 week cash forecast — expected receipts minus expected payments, week by week — fits on one page and prevents most cash surprises.

Extending credit without getting burned

Offering payment terms is a sales tool — “Net 30” wins orders that “cash up front” loses. But every term sale is a small unsecured loan, so extend credit the way a careful lender would. Get a simple credit application in writing before the first term sale — business name, address, how long they’ve operated, and two or three trade references. Put the terms in writing on every invoice: payment terms, due date, and consequences of late payment. Start small and grow: a new customer’s limit grows with a record of on-time payment — trust is earned in installments. Consider deposits on large orders: a 30–50% deposit up front is standard in many industries — it commits the customer, funds your upfront costs, and cuts your exposure. Deposits are unearned revenue until earned — handle the books accordingly.

The cash conversion cycle, in plain English

How many days does your cash spend “out in the world” before it comes back? Think of a retailer: she pays her supplier (cash out), the goods sit on the shelf, a customer buys them on terms, and 25 days later the customer pays (cash in). From paying the supplier to collecting from the customer might be 45 days — for 45 days, her cash is tied up in inventory and receivables instead of sitting in her account.

Two levers shorten the cycle: collect faster and manage payables deliberately (pay on terms, capture discounts — but never pay late to “improve” the cycle; the fees and damaged relationships cost more than the float is worth). If your sales are up and your bank account is down, the conversion cycle is the first place to look.

The discipline in one page

The weekly routine — thirty minutes: run the AR aging report and contact everyone past due per the collections schedule; run the AP aging report and schedule this week’s payments (discounts first, critical vendors next, everything else on terms); update the cash forecast and flag any week where outflows exceed inflows plus cushion; record any write-offs, adjustments, or new credit limits.

Key takeaways

• Every unpaid invoice is an interest-free loan to your customer — run the AR aging report weekly and work the collections routine (nudge at 1 day, call at 15–30, firm notice at 45–60, decide at 90+).
• Check new customers’ credit and set credit limits before extending terms; put terms in writing on every invoice.
• Write off uncollectible invoices honestly (Bad Debt Expense) — dead receivables inflate your books.
• Run the AP aging report weekly; pay on terms, capture early-payment discounts, and prioritize critical vendors.
• Collect W-9s from service vendors before the first payment to make year-end 1099s painless.
• Manage cash-flow timing with a rolling 4–6 week forecast, and keep a 1–2 month operating-expense cushion.