Continuing from our article on The Eight Levers to Increase Cash Flow, we turn to the dreaded accounts receivable. The bane of all small businesses. It’s the worst of all worlds, you’ve spent the money, delivered the goods or services, but you haven’t been paid yet. Frankly you’d be better off if you had never done the work if you can’t collect the money!
The best place to start with a target accounts receivable amount is by industry benchmarking. For many businesses, this is eye opening when they see how different their accounts receivable is compared to others of the same size. Remember, if your competition can do it, so can you!
Discounts: Tried and true. Offer a discount for early or prompt payment. But be careful, those small amounts add up. A 2% discount for an invoice that is due in 30 days could end up costing you over 24% in annual “interest”. You can usually borrow money cheaper than that! Usually, only your strongest financial customers are going to take you up on this offer.
Payment Methods: Are you accepting payments in all forms? Credit cards, PayPal, BitCoin? The more options your customers have, the easier it is for them to pay you. Of course these alternatives have a cost associated with them, so make sure you’ve built this cost into your pricing. Do you have an online payment option? If not, get one!
Credit and Collection Policy: The best way to handle an accounts receivable problem is to not have one in the first place. Create a credit policy, and stick to it! Determine how much credit you will extend to different customers and evaluate them regularly. Obtain credit references and/or credit reports for new customers. Pay attention to your industry. If there is a potential downturn, don’t wait to tighten up your credit standards. You have to sell a lot to make up the profit on those credit losses, so sometimes it’s better to not make the sale!
After the sale, what is your collection process? Do you send regular statements? Is someone calling customers as soon as their account is past due? Do you limit future sales to delinquent accounts? Again, have a policy/process and stick to it.
Legal: Industries and jurisdictions differ, but often there are ways to protect yourself legally for accounts receivable. For instance, many times you can obtain a security interest in items/goods that you sell on credit. Consult with your local attorney to find out what options you have.
If you would like a FREE industry comparison for your business, schedule a no-obligation consultation. We promise, no pressure, just information to help increase your cash flow so that you can have a better business, and a less stressful life!