We all love getting paid, don’t we? And wouldn’t it be great if customers all just handed us cash when we delivered our products or services?
It’s kind of a no-brainer to say that most small business owners would prefer to have cash, as opposed to accounts receivable, or money they are expecting to be paid by customers after the products/services have been delivered. But as CPA Sheila Shanker points out in smallbusiness.chron.com, many small businesses—consultants and medical practices are just two examples—don’t use cash-based operating models. This simply means they don’t collect on the spot and must wait to get paid. These outstanding payments become “accounts receivable” in their accounting systems.
Accounts receivable and “collections” go hand in hand, because it is just a fact of life that some customers will not pay in full or on time, according to the terms they agreed to upfront. Shanker advises small businesses to pay close attention to accounts receivable—and to collecting them—because both can potentially impact your operations in significant ways. Here are a few things to know:
- Liquidity. A common term for receivables is 30 days, but more and more, businesses are changing that to improve cash flow and liquidity. For example, many are offering a two percent discount for payments made in 10 days. Others are simply moving due dates up or encouraging “payment on receipt.”
- Economy. Despite having to wait for payment when you have receivables, Shanker says accepting payments later can be a good sales strategy, just like accepting credit cards, which will likely increase your customer base. In today’s world, cash-only businesses are dwindling.
- Ratios and reports. It’s important to make use of accounting tools to see what’s working (or not) with your accounts receivable. The “current ratio,” for instance, gives you a sense of how quickly receivables are being collected. The “aging receivables report” helps you pinpoint slow payers and other problems.
- Other considerations. Some businesses consider their receivables an investment and charge interest to late payers. A long-past-due receivable can be turned into a formal “note receivable,” which spells out new interest and payment terms.
More often than not, small business owners who are juggling multiple roles find it difficult to focus enough attention on their accounts receivable. Once those invoices are out, that’s it, until payment arrives.
But because getting paid, and getting paid as quickly as possible, is increasingly critical to a business’s ability to operate, “accounts receivable management” has emerged as its own defined process. And more and more, this process is outsourced to companies who specialize in it. Funding Gates (fundinggates.com) is an example of one such company that employs a “CRM” (customer relationship management”) approach to managing receivables.
The CRM philosophy is based on the fact that managing receivables is a part of the sales process and as such, should incorporate the same CRM discipline and details that are in the sales DNA. Taking a CRM approach, experts say, helps maintain customer relationships, which should always be the #1 goal. It also enhances internal communication and increases collected funds.
Meanwhile, if you’ve decided to review or re-think how you’re handling your accounts receivable, the website Young, Fabulous and Self-Employed (yfsentrepreneur.com) lists 26 Things Every Small Business Owner Needs to Know About Accounts Receivable Management. This list gives you the A to Z rundown on key accounts receivables management terms and concepts. CRM is included in this list, but at the same time entries like “Late Payment Excuses” recommend standing your ground on payment, even if your favorite customers try to appeal to your soft side.
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