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.