Your financial statements look great – they show that you are making a healthy profit. But, you’re scratching your head, wondering why you are struggling to pay the bills. Cash flow is a critical element that every company needs to operate. When cash flow is tight, it can impact your ability to pay your employees and bills, meet your obligations, purchase inventory, and invest further in your company. It may be possible that your cash flow is tied up on your balance sheet under an account known as “Accounts Receivable.”
Accounts receivable represent sales that have been granted based on credit. Selling goods and services on credit is a fairly standard practice for a business. Without the ability to extend credit, a company can put itself at a competitive disadvantage. After all, if your competitors grant credit but you don’t – you could lose sales. On the flip side, if customers take a long time to pay, that can impact the operations of your company. When your customers become collection problems, you may not have enough cash on hand to be able to pay your employees or vendors. You may struggle to pay your monthly bills, such as rent and insurance. This may force you to borrow money or pay your bills late, which can impact your ability to receive credit from your vendors. And if the problem is severe enough, a small business may not be able to survive.
Maintaining a healthy balance between extending credit and collecting receivables can be the difference between thriving and struggling. Valley Business Centre suggests the following ways to improve collecting your accounts receivable:
Managing collections starts with deciding what your policies are. Here, you will consider such things as;
- What is your approval process? Many companies have an application process for their vendors. They may ask for credit references, copies of current financial statements or tax returns, and may even run a credit check. You may apply these policies across the board, or you may tailor them to specific situations. As an example, a new customer that is placing a large order may require a more extensive approval process, as opposed to a new customer placing a small order.
- Be responsive – When you do receive a credit application, establish a timeline to complete your process. If the application process takes too long, it can result in lost sales.
- External factors – Keep an eye out for issues that may impact collectability. Changes in the economy or a customer in an industry that is growing quickly may impact your readiness to extend credit.
- Limits – Who will set credit limits within your company? Can these be overridden?
Maintaining current information on your customers will help to ensure that you have the correct contact information when you are sending out invoices. It is a good practice to determine if the billing contact is the same person that placed the order.
Here, you will also include information about each customer’s credit terms. This will help to ensure that credit is being granted based on what has been approved. In addition, changes to a customer’s credit should be included here as well.
Bookkeeping software packages, such as QuickBooks and Xero, allow you to invoice your customers through the bookkeeping system. By using a software package to generate bills, you maintain control over you invoices. Your sales are automatically entered into your system, saving you time and giving you the ability to stay on top of those customers who may not have paid you yet.
Customers can only pay if they have an invoice. Make it a point to bill your customers quickly and correctly. Delays in billing or errors on invoices will hold up the payment process. Take all steps to ensure that your bills have the correct information. Verify quantities, unit prices, and, if you aren’t using a bookkeeping program, check the math on the totals. Errors can result in delays in payment or you may be paid the wrong amount.
Post Payments Timely
When payments are received by your customers, they should be posted against the bills that they are paying. Payments should be posted as soon as possible to keep your accounts receivable balance current and your accounts receivable aging report reflects the amount that is still due to you. Another good practice is to deposit payments should be deposited into your bank account on a regular basis to ensure that they aren’t lost and that the customer’s funds are available.
Use a Bookkeeping Service
Small business owners can have considerable demands upon their time. If you are unable to keep your books and records up-to-date, consider outsourcing this function to a reputable bookkeeping service. They can assist you with managing your accounts receivable and incoming payments.
Your Collection Process
Accounts receivable aging – Reviewing your accounts receivable aging will help you to make sure that you are being paid timely. An accounts receivable aging lists open invoices and how long they have been outstanding. This report should be reviewed in connection with your credit policies. If you extend credit with the understanding that invoices will be paid within a specified number of days, review the aging report to verify that customers are meeting this expectation.
Statements – send statements to customers on a monthly basis. Statements list all invoices that you are currently showing as open. Many times, if there is a problem with an invoice or a payment has been sent, a customer may contact you.
Stay in contact with your customers – Emails and phone calls are great reminders that an open balance exists. This also provides a company with the opportunity to discuss delays or challenges that a customer may have with paying their bill. Perhaps the customer can make payments over time. Even though this may not help your current cash flow, it will help you to get paid.
Collection agencies – When you have exhausted all other measures, sending the balance due to a collection agency may be a last resort. It is recommended that all your attempts be made to resolve this directly with the customer before this step is taken.
Cash flow is critical to the operations of a company. Taking steps to better manage your accounts receivable will improve your company’s performance, as well as help to ensure a profitable future. If you are a small business owner that is struggling with managing your cash flow, the specialists at Valley Business Centre can help you to find ways to better manage your accounts receivable process.
With the New Year upon us, we are often busy setting resolutions to adopt healthier eating and exercise habits, to get more sleep, and to find ways to have less stress in our lives. But if you are a business owner, what are your resolutions to improve financial health of your company? Whether 2018 was stellar or a struggle, why not take this opportunity to improve the financial health and success of your business in the New Year?
Consider adopting these resolutions to get your business in shape.
Update Your Files
As we file away the old, the beginning of the year is a great time to get your current files in organized and in an orderly fashion. Whether you keep files for customers, vendors, employees, or contractors – keeping files current can save time tracking down information, prevent errors, and reduce delays. Here are a few best practices;
Customers – Whether you keep your customer information electronically or hard copy, now is a good time to review what you have on file. Verify contact information and billing addresses, including names, addresses, phone numbers, and email addresses. Depending upon your business, you might review your customer’s history, specifically the frequency of orders and payments. If an account was a little slow in paying or hasn’t placed an order in a while, consider reviewing this activity with them. The New Year can open up the opportunity to improve payment frequency or even win back a customer.
Vendors – Review your vendor files to ensure you have the correct contact and payment information. If your company requires vendors to submit insurance or financial information, be sure to update your files with current data.
Employees – If you have employees, the beginning of the year is a perfect time to ask employees to review their withholdings. This is especially critical for employees if tax laws or withholding thresholds change. Remind employees that any changes to their withholding must be documented in writing on Forms TD1 and TD1BC.
As an employer, you should review your payroll files to ensure that all documentation is current and has not expired, that any compensation changes have been made, and any requests for deductions from a paycheck are current and documented in writing. In some cases, benefits may need to be updated due to the length of time an employee has worked with the company. While this may not occur on January 1, consider putting this on a calendar or schedule so that it is put in effect at the right time during the year.
Contractors – For a business, properly assessing and documenting the independent contractor relationship can save immensely. When classification or documentation errors are made, the taxes and penalties that arise can be very costly to a business. A best practice is to review the nature of the relationship in accordance with the CRA. A business should maintain copies of signed contracts, as well as current insurance certificates, if applicable.
Know Your Deadlines
While 2018 may have come and gone, its deadlines are still lingering. Know what your filing deadlines are and what is required to be filed. Deadlines exist throughout the year for a myriad of taxes and licenses, as well as your annual report. Not only can missing a deadline cause the additional headache of penalties and interest, it can impact your ability to operate if you are behind in your license or corporate annual report filings.
Reflect and Move Forward
How did 2018 end up for your business? If you prepared a budget, how close was your activity for the year? Reflecting on how your business did in 2018 will help you to focus on areas of improvement in 2019. If your telephone or internet bills were higher than expected, perhaps there is a more cost effective plan for 2019. If you found yourself making sales in 2018 but struggled with cash flow, your credit policies may need to be tightened up.
While you can’t change what happened in 2018, you can impact the New Year. Use 2018 to identify trends and areas for improvement. Use historical information to help you set goals for the future. And if you didn’t prepare a budget for 2018, consider putting one together for 2019.
Small business owners are often pulled in multiple directions, handling one urgency after another. Often times, owners get caught up in the busyness of the day that they don’t dedicate time to record keeping. Entering transactions into your bookkeeping system, paying bills, filing invoices, and reconciling bank and credit card statements tend to take a back seat when you are swamped. While it’s easy to set this aside with the plan of getting to it later, resist that urge! Updating your records will always need to be done and, rest assured, it will pop at the most inopportune and stressful time.
Staying current will not only keep your stress level down, but it will provide valuable financial information that you need to run your business. You will be able to see where your funds are going, how much you are spending, and if you are charging your customers enough money. It will allow you to provide information timely to your accountant. If you are considering financing equipment or entering into a business loan, you will need to provide current financial information.
In the New Year, resolve to stay on top of your bookkeeping system. Whether it is blocking a few hours out on your calendar each week to dedicate to your books and records or taking an hour each day, staying on top of your finances will not only give you valuable information about your business, it will greatly reduce your stress level. Invest your time in the financial health of your company. Keep your records current.
Be Realistic – You May Need to Delegate or Outsource
As a business owner, always assess where your time is being spent. Many times, owners try to do it at all in the interest of saving money. Perhaps their time is better spent meeting with prospective and existing customers, or forging strategic vendor relationships. Consider the cost-benefit of the tasks that you do as an owner. In some cases, it may be more cost effective to delegate routine or mundane tasks to an employee. In some cases, you might consider outsourcing the function altogether. Owners often outsource their bookkeeping and payroll services, not only to free up their time, but also to receive timely financial information. Timely financial information can empower a business owner to make better decisions about their operations.
A company that is financially healthy can bring prosperity and profitability to its owners. It can provide jobs to employees, as well as give back to the community. Whether 2018 brought prosperity or struggle to your business, consider the financial health of your business your top resolution for year.