Money does funny things to people. I lost a good friend some years ago over his accounts receivable. He had been a client for many years, and we grew to be friends. As time went on, I noticed that he was always on my Accounts Receivable report.
The time came when I started e-mailing him each week, asking about payment. No response. There were other things he would e-mail about, asking for a report, or some such thing, and I would respond. Those e-mails he had no problem responding to. I began to wonder, if we’re such good friends, where is the respect? I would never do that to a friend of mine. I would never do it to anyone. If I owe somebody money, I pay it, well before they have to ask me for it. If for some reason I can’t pay it, I tell them. You should never put someone in the position where they have to ask you about money you owe them.
The time came when I was simply tired of chasing him, and others to get paid. The time I was spending following up on payment felt like a very big waste of time. I became resentful that I wasn’t able to spend that time on more productive things. So when my friend and client wasn’t replying to my e-mails about payment, I simply stopped doing the work. Eventually he called, wanting to know where the work was. When I told him I had stopped doing the work, he was very upset. He claimed he never saw the e-mails. I didn’t buy it.
We parted company after that, both as friends and as client / consultant. At this point I decided it was time to change. I never wanted this to happen again. So I took a page out of my lawyer client’s books. I decided I was going to collect retainers. This was not traditional in the accounting industry, but I didn’t care. It was a simple matter of whether I was willing to let a prospect walk away over this, and I was. It was simple. I don’t want to have to worry about the money. I just want to focus on doing an amazing job. Besides, if the client wants me to do the work right away, why shouldn’t they be prepared to make a payment right away?
So the answer to ‘how to eliminate accounts receivable’, is to insist on getting paid up front. This model lends itself much better to charging a flat monthly fee. This way you collect your payment on the first, or on the anniversary of when you started each month.
The accounting treatment is simple. You collect the money, and it goes to a liability. You earn the money, invoice the client, and apply the retainer to the balance. If you are charging a flat monthly fee, then there is no need to run it through a liability account. Assume you are going to do the work, and earn the money.
At this point, I don’t even send invoices anymore. My clients are sent a link to crate a monthly subscription with me. Each month, their card is charged our agreed upon amount. On their end, it comes through in the bank feeds, and gets coded to accounting fees.
I no longer have receivables and I no longer have to spend time chasing people for money. It is a much better way of doing business. Once the terms are agreed upon, the money should be in the background. This way you can focus on your clients — on improving their lives so profoundly, they couldn’t imagine working with anyone else.