Many of my small business owner clients are finding their accounts receivables to be increasing this year. Their customers and clients are experiencing some cash flow crunches and delaying their payments, in turn causing some cash flow crunches for my clients.
While most small business owners are not surprised by their increasing receivables balances, I am concerned that many of them are not reacting quickly enough to the situation. In addition, to communicating with current clients with overdue invoices, it's important for business owners to be sure that policies, procedures, systems and measurements are in place to ensure that future credit sales are more profitable.
Policies and procedures - Prior to even making the sale, we must be sure to have credit policies in place - who do we extend credit to and how do we assess credit worthiness. Also, we must have established payment terms in place.
A System to manage receivables - Once, credit has been extended, the business needs a system to track outstanding receivables with established steps to handle overdue accounts based upon age.
Measurement tools - Take the guess work out of knowing how well you are doing with your receivables. Use financial ratios and statistics to track your progress versus historical performance. One simple financial ratio is the Accounts Receivable Collection Rate (in days) which is the accounts receivable balance times 365 divided by total credit sales. Many other statistics are available as well, some being industry related. Be sure to view your receivables in terms of your credit sales revenue since a higher receivables balance in and of itself may not be all bad - if your sales are increasing as well!
Your accounts receivables are costing you real money. That's uncollected cash that could be used to grow your business, pay off debt or make payroll. It's an opportunity cost that we want to minimize in order to maximize our cash flow. Your Thoughts?
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