ACCOUNTS RECEIVABLE

Accounts receivable describes the amount of cash, goods, or services owed to a business by a client or customer. The manner in which the collection of outstanding bills are handled, especially in a small business, can be a pivotal factor in determining a company's profitability. Getting the sale is the first step of the cash flow process, but all the sales in the world are of little use if monetary compensation is not forthcoming. Moreover, when a business has trouble collecting what it is owed, it also often has trouble paying off the bills (accounts payable) it owes to others.

MAKING COLLECTIONS Just as there's an art of the sale, there is an art of the collection. In an ideal world, a company's accounts receivable collections would coincide with the firm's accounts payable schedule. But there are many outside factors working against timely payments, some of which are beyond the control of even the most efficient of collection systems. Seasonal demands, vendor shortages, stock market fluctuations, and other economic indicators can all contribute to a client's inability to pay bills in a timely fashion. Recognizing those factors, and learning to make business plans with them in mind, can make a big difference in establishing a solid accounts receivable system for your business.

By looking at receipts from past billing cycles, it is often possible to detect recurring cash flow problems with some clients, and to plan accordingly. Small business owners need to examine clients on a case-by-case basis, of course. In some instances, the debtor company may simply have an inattentive sales force or accounts payable department that needs repeated prodding to make its payment obligations. But in other cases, the debtor company may simply need a little more time to make good on its financial obligations. In many instances, it is in the best interests of the creditor company to cut such establishments a little slack. After all, a business that is owed money by a company that files for bankruptcy protection is likely to see very little of it, whereas a well-managed business that is given the chance to grow and prosper can develop into a valued long-term client.

METHODS OF COLLECTING A good way to improve cash flow is to make the entire company aware of the importance of accounts receivable, and to make collections a top priority. Invoice statements for each outstanding account should be reviewed on a regular basis, and a weekly schedule of collection goals should be established. Other tips in the realm of accounts receivable collection include:

* Do not delay in making follow-up calls, especially with clients who have a history of paying late
* Curb late payment excuses by including a prepaid payment envelope with each invoice
* Get credit references for new clients, and check them out thoroughly before agreeing to do business with them
* Know when to let go of a bad account; if a debt has been on the books for so long that the cost of pursuing payment it is proving exorbitant, it may be time to consider giving up and moving on (the wisdom of this depends a lot on the amount owed, of course).
* Collection agencies should only be used as a last resort.

ACCOUNTS RECEIVABLE FINANCING

Accounts receivable financing provides cash funding on the strength of a company's outstanding invoices. Instead of buying accounts, lenders use invoices as collateral for the loan. Besides benefiting a business in debt, accounts receivable financiers can assume greater risks than traditional lenders, and will also lend to new and vibrant businesses that demonstrate real potential. An accounts receivable lender will also handle other aspects of the account, including collections and deposits, freeing the company to focus on other areas of productivity. However, risks are involved, and agreements are typically lengthy and steeped in legal lingo. Before considering this type of financing, sound financial and legal advice should be secured to make sure that it is appropriate for your company.

2 comments:

Erin W. said...

Neat post. I'll keep this in mind because I plan on running my own business soon. I know it'll be tough, so I can use all the help and advice I can get. More recently I've been thinking about buying a business instead of starting one from scratch. Maybe a franchise? Home based? I’m not sure. Do you have any suggestions? Advice? Thanks.

Brianna Smith said...

Erin - I can tell you this now... Running a business will be tough. I'm sure there will be days you'll want to give up, but if you stick through it and persevere, becoming an entrepreneur will be worth it. That being said, there are a lot of resources on-line if you're looking to buy a business instead of starting one from scratch. I know there's this site called BizTrader.com, and it's like this on-line global marketplace where you can buy or sell a business. You can also use it to find a lender, broker, etc. Local small business groups are also good because you can network, and they can update you on the area you plan on doing business. Good luck!