Techniques to Improve A/R Turnover Without Discounting
It’s often said that if your customer owes you $1,000, they have a problem. But if they owe you $1 million, then it’s your problem. Nothing could be more true.
During the heyday of the dot-com boom, a slew of wireless operators emerged offering services in high-frequency bands called LMDS and MMDS. One such company, Maxlink, was using LMDS to provide commercial data service in Canada.
The day they went bankrupt, they owed us nothing. But just one month prior, they owed us over $1 million. That amount of bad debt would have spelled bankruptcy for our small company, which had only $11.5 million in sales that year.
I had allowed the allure of large orders to overtake my judgment. I knew these technologies weren’t viable. I had said so myself, but we still chased the orders. Worse, we extended them credit terms we couldn’t really afford and they weren’t worthy of. That experience taught me the value of trusting my gut when assessing credit risk.
Managing accounts receivable is crucial to your business health, cash flow, and working capital efficiency. There are ways of getting paid faster that don’t carry the high costs of early-payment discounts, factoring and the like.
Know Where You Stand
Start by running an accounts receivable aging report.
This report will show you exactly who owes you money and how long their invoices have been outstanding. In a smaller business, reviewing this on a weekly basis might be sufficient. However, once your operation reaches a certain size, it becomes crucial to have someone on your team reviewing it daily.
From there, calculate your “Days Receivable” using the formula:
Accounts Receivable divided by Average Daily Credit Sales.
This simple ratio provides a snapshot of how efficiently your company converts sales into actual cash in the bank. Now, benchmark yourself against the average in your industry and ask how you’re doing.
It can really vary based on what kind of business you’re in. If your customers are general retailers, you’re likely getting paid in 30 – 45 days. Manufacturing and tech are closer to 45 or 60, and industries like construction, mining, or other resource extraction run 90+ days. At the other end of the spectrum, restaurants can be lucky if their suppliers give them 7 or 14 days to pay!
If you’re unsure about your industry, visit this page at ReadyRatios.com for guidance.
If you’re nailing your collections and are getting paid faster than your peers, kudos to you. And if your Days Receivable significantly exceeds that industry benchmark, and you’re plagued with cash flow issues, then it’s time to rethink your credit policies. First, segment your customers:
- Habitual late payers
- Slow but reliable
- Fast payers
Be careful here. Credit management is part art, part science, and this story from my book is a great example of how ‘one size does not fit all.’
Susanna, our new credit manager, flagged a $100K+ outstanding balance from Micro Components Ltd. They were a long-standing customer who bought both large and small-ticket items. While they always paid late, they also always paid in full. Their owner Alex was a very ethical and serious engineer who prided himself on his professional reputation. He had A+ customers despite only being about a $10 million company. Susanna didn’t know their history or that their customers were the U.S. and Canadian military, who are notoriously slow payers.
She wanted to cut off Micro Components but I explained how they were a very loyal customer who had never failed to pay—they had just also never failed to pay late. Susanna was rightfully concerned not knowing the history, and further was concerned because her bonus was based on days receivable across the board. To solve that we adjusted how we calculated aging and kept shipping to Alex. That’s why rigid rules don’t work when managing credit.
Fix What’s Broken in Your Process
Start by invoicing immediately and making those invoices crystal clear. Vague descriptions or missing purchase order numbers are a gift to slow-paying customers, offering them a built-in excuse to delay payment. Eliminate those excuses from the outset.
Next, use invoicing tools that support automatic reminders. Most modern accounting systems and small business ERPs have this feature built in, and it saves both time and awkward follow-ups.
You should also make it as easy as possible for customers to pay. Accept multiple payment methods—credit card, ACH, e-transfer, payment links, even QR codes. The fewer clicks it takes to pay you, the better.
Finally, be realistic when setting payment terms. Look at your industry norms and respect them. You can’t push a rope uphill, and if you try to force unusually tight terms on your customers, you might just push them away entirely.
Train Your Customers and You'll Be Getting Paid Faster!
It pays, literally, to be proactive. A day or two before an invoice is due, pick up the phone and make a courtesy call. Something along the lines of, “Just checking that we’re in the queue for payment,” is enough. It’s a gentle nudge that keeps you top of mind without sounding confrontational and reminds your customers that you’re a stickler for payment.
For brand-new customers, use signaling theory to communicate how you expect to be treated. By following up diligently on your first few invoices, you’re training your customer that you don’t let payments slip through the cracks, and that if they do, they can count on hearing from that pest so and so.
Sometimes, especially with larger invoices, it helps if the owner personally gets involved. When a customer delayed payment, I used to say, “You know Bill, when I took your order, I was really excited about being your supplier. But I didn’t think I was signing up to be your bank.”
You’re not being rude. You’re running a business.
If payment doesn’t come after the initial follow-up, escalate the tone and frequency. A professional collections process might look like this: a friendly reminder, followed by a second notice, and then a final notice indicating possible credit hold or legal action. You’re going to alternate between phone and email based on the circumstances.
A note about late fees:
Late fees are often a point of confusion in business transactions. Many companies put them on their invoices, but unless those fees were clearly agreed to in advance, ideally as part of a signed contract, they’re usually meaningless. Most commercial buyers treat these line items as suggestions rather than obligations. In over two decades of running businesses, I’ve probably seen late fees listed on hundreds of supplier invoices and statements. And not once have I paid a dime in late fees unless I was contractually bound to do so.
The distinction here is important. With a credit card, for example, you agree in writing to a schedule of fees and penalties. If you pay late, you’ve accepted that interest will accrue and that the credit issuer has the legal right to enforce it. However, when a vendor simply adds a “2% per month late fee” line to your invoice without any underlying agreement, it’s rarely enforceable. Unless both parties have explicitly agreed to those terms in advance, either by contract or through detailed purchase order (PO) terms, most customers will likely ignore them. I suggest you do the same.
Rethink Customer Risk
Credit decisions aren’t just binary—it’s not always a simple “yes” or “no.” Sometimes the most strategic answer is “yes, and…” meaning, yes, we’ll extend you credit, and here’s how we’re going to do it.
One of the most effective ways to manage risk is through milestone billing or requiring partial prepayments. These techniques are particularly valuable in service-based businesses or custom manufacturing, where upfront costs are substantial and timelines are long. Breaking payments into chunks tied to deliverables keeps everyone aligned and protects your cash flow.
For clients who have slipped into late payment habits but still want to place orders, consider shifting them to a “COD+” arrangement. This means cash on delivery, plus a small additional amount that chips away at their outstanding balance. It’s a fair, enforceable compromise that keeps business moving without deepening your risk.
For larger orders or when dealing with brand-new clients, it’s smart to run a credit check using services like Dun & Bradstreet or Equifax. If something seems off—or if your gut just doesn’t sit right—ask for a deposit. You’ll be surprised how often this request is met with immediate compliance. Responsible companies usually don’t balk at basic risk management.
If you’re unsure where to start or want to formalize this process, I’ve created a simple downloadable checklist to guide your new-customer assessments. You can grab it here.
Getting paid faster means setting expectations, removing friction, and standing your ground.
Want help assessing your receivables or setting up a credit policy? Reach out.
