Accounts Receivable: "The process of collecting money your customers owe you." Failure to have this process working well leads to insufficient cashflow and is a major contributor to business failure. Ignore it at your peril! Yellow Belt
- Your Sales volume is adequate.
- You have a decent profit margin.
If you bill your customers and retrieve that money on time, you have the required funds to pay your expenses.
It is obvious - you need to focus on getting the Income from your Sales from your Customers.
This is Accounts Receivable.
Small businesses put off collecting their outstanding Accounts Receivables. It is something they don’t particularly enjoy doing.
This is a recipe for impending disaster.
Receivables collection can be something that you delegate to another to do the bookwork.
Do not fall into the trap of delegating the monitoring of your Receivables.
Accounting packages will give you an “Aged Debtors” list.
This lists the number and dollar amount of outstanding (uncollected) customer debts.
This shows debts outstanding under 30, 60 and 90+ days.
Watch these figures like a hawk!
- Do not have any in the 90+ group.
- Aim for none in the 60 day group.
Sounds like a lot of work but having that cashflow coming in will let you sleep better at night.
Watching your Receivables is a small price to pay for a better lifestyle and a more sustainable business.
When you look at this data on a week to week basis, it is easy to miss any evolving trends.
- Plot each week’s Receivables on a graph.
- Any worsening trend will be visually clear to you.
The Cash Conversion Cycle article outlines a more sophisticated metric.
This is suitable for your cashflow in general and in particular, your Receivables.
Speed up Collection
Following are 15 well tested methods to speed up your Account Receivable collections:
- Unless you ask for your money, you will not get paid on time.
Set up a "nag" cycle: ping your customers regularly to encourage them to pay earlier.
- Offer some value back to customers who pay on time or in advance.
Giving this value back in cash, for example a discount, will have a negative impact on your Profitability.
Give them something that costs you little, or nothing that they value.
Example: some sort of personalisation of your product.
- Consider your billing cycle to be a work flow like a factory.
Find the constraint in the production of your invoices.
Then build an invoicing system around that constraint.
Invoices will then go out on time.
- Start your nagging cycle a few days before the actual payment due date.
Your customers will start to be tuned that the bill is due and are likely to pay earlier.
- Find out your customers payment process and remind them a few days before that.
Many businesses pay bills on a certain day of the week or month.
If you can get ahead of them by several days, you are more likely to catch the next payment cycle.
- You could consider constructive use of credit cards.
Do your customers pay on a recurring basis for a service.
Get them to give you a credit card that you can bill rather than invoicing them and waiting for them to pay.
This can be more convenient.
The credit card allows payment even if they have a cash shortfall.
It acts as a buffer.
- Arrange a periodic direct debit for recurring customers.
Ensure that they are likely to have the required funds available when you make the drawing.
- Do not use credit cards, to pay bills, if you are not able to pay the balance on the credit card in full each month.
Credit card debt can be very expensive.
If you can pay your credit card balance in a monthly cycle, you have improved your cash flow cycle by the difference in timing.
Get a credit card that gives you Frequent Flyer points.
Your Accounts Payable can pay a chunk of your travel budget.
- If customers are paying slowly they may be:
Unhappy with your product or service.
Making an issue of it by stalling so that you "learn your lesson".
Your invoices could be frequently wrong and this is irritating the customers.
Removing these types of defects will make for happier customers
- Do your invoices contain many products that have different delivery times and cycles?
Are you waiting for all components of the invoice to be delivered before providing the invoice.
Reduce this lag time by invoicing items as soon as they are delivered.
Multiple invoices in this electronic day and age are not a particularly high cost.
If your customer requires complete delivery before payment this will not help.
- Tune your payment method to what the customer is looking for:
They may buy more.
They may pay faster.
Rather than a customer buying a product you could lease it to them.
Rather than saving the cash to buy the product, they can enter a lease agreement sooner.
This has improved your Cash Conversion Cycle.
See the pricing article "How 1% Price Change Could Give 20% Profit Increase".
- Put a specific due date on the bill rather than the more common "Pay in 30 days".
People do not pay attention to when the bill arrived.
They do not have a clear understanding of when 30 days has elapsed.
If you put a specific date on the bill, they will keep that in focus.
Payment of bills travel from more senior personnel to the Accounts Payable Clerk.
If you make your bills "payable within 30 days" the Senior and the Clerk have no real idea when that 30 days is up.
The Clerk can escalate your bills, as they come close to their specific due date.
- Invoice electronically via email to reduce the elapsed time in snail mail transmission.
- If possible, get full or part payment in advance of supply.
With product sold over the Internet, this is increasing possible.
Amazon and Dell Computers use this process to fund their blistering growth. Learn about this in the Cashflow Wizards article.
- You can get debts paid to you on behalf of debtors by specialists such as “AfterPay”.
Broadly speaking, this is known as ‘factoring’.
The advance payment comes at a cost but might still be worthwhile.
You may not get paid for uncollectable debts.
Good Accounts Receivable management is one of the four parts to good cashflow management. This link outlines what you will learn in the Profit Accelerator programs.
Good cashflow is the key to a healthy business and a major determinant of the rate at which you can grow.
You can see a collection of cashflow related articles in the Cashflow menu.