There are many different things that go into running a successful business. Generating sales is important, of course, as is hiring good employees, managing them well and making sure operations run smoothly.
But there’s one component of business success that is often overlooked by many owners and entrepreneurs: collecting accounts receivable. Sales are great, but more companies fail due to poor cash flow than a lack of sales and revenue. Or as veteran entrepreneur Nolan Bushnell, founder of Atari and the Chuck E. Cheese restaurant chain, once put it, “A sale is a gift to the customer until the money is in the bank.”
The Short End
Unfortunately, small businesses often come out on the short end of the stick when it comes to accounts receivable collections — especially when doing business with large corporations. Many big-box retailers, for example, are stretching out their payment terms to vendors and suppliers — sometimes for up to 90 and even 120 days. This is squeezing many small business’ cash flow cycles tighter and tighter.
But large corporations aren’t the only businesses that sometimes pay their bills slowly. In order to boost their own cash flow in the ongoing sluggish economy, some companies have made paying their bills late a matter of course. If terms are net-30 days, for example, they might not make payment until day 45 or later. Or if payment is due in 45 days, they might stretch this out to 60 days or longer.
As the owner of a small business, you might sometimes feel helpless when it comes to getting your customers to pay their bills on time. But this is absolutely the wrong attitude to take. Instead, be proactive by making accounts receivable collections a top priority not just in your accounting department, but company wide. Bring representatives from your financial and accounting, management, sales and other departments together to come up with a comprehensive strategy geared toward maximizing accounts receivable collections.
Consider these six tips for improving collection of your accounts receivable:
1. Create an A/R Aging Report. The first step to take in your collections efforts is to determine the current payment status of all your accounts receivable. This is done by creating an accounts receivable (A/R) aging report, which will track and measure the payment status of all your customers. Accounts are broken out by the number of days since the invoice was issued (such as 0-30 days, 31-60, 61-90 days, and beyond 90 days) and the amounts due. This way, you can spot potential collection problems early, before accounts become significantly past due, and focus your collection efforts more efficiently.
2. Be proactive in your invoicing and collections efforts. There are usually things you can do when submitting invoices to help make it easier for your clients to pay them. For example, make sure your invoices are clear and complete, with no missing information that might cause your client’s accounting department to kick it out of the system for further review.
Learn the subtle nuances of each client’s invoice payment procedures and follow them carefully. A few days before payment is due, have someone in your accounting department contact your client’s accounting department to make sure they have everything needed to make payment — especially if the invoice is a big one.
3. Move fast on past-due receivables. Studies have shown that the longer receivables go uncollected, the less likely they are to ever be collected, either partially or in full. So day 45 is not the time to contact a client about a payment that was due on day 30.
Instead, your accounting department should be calling or emailing clients the first day that payment is late. Start with a gentle reminder that payment is now past due — this is usually sufficient to prompt most clients to pay right away. Firmer communications may become necessary if payment is not forthcoming within a reasonable amount of time, including dunning letters informing clients that legal action may commence if payment isn’t received by a certain deadline.
4. Consider offering an early payment discount. With a 2/10, net/30 discount, for example, customers will receive a 2 percent discount if they pay within 10 days, instead of 30. While there is a cost to your business in offering such a discount, the cash flow boost it provides could make it worthwhile.
5. Consider offering some past-due clients a payment plan. Your past-due client might inform you that they are having cash flow challenges of their own, and ask for a little bit of help. In this scenario, you could offer the client a payment plan for the amount that’s past due. If so, be sure to put the plan and its terms in writing and have both parties sign it. And make all future sales COD until the past-due amount is paid in full.
6. Talk to your bank about cash management tools that can help. Banks offer a wide range of cash management services that can help you improve collections and better manage your cash flow cycle. One of these is wholesale lockbox, in which customers mail checks to a special post office box monitored by the bank, which collects and deposits them immediately. Another is electronic payments made via the Automated Clearing House (ACH), which eliminates “the check is in the mail” syndrome altogether.
To discuss accounts receivable strategies and cash management tools like these in more detail, call City National Bank at (800) 773-7100 or visit Contact Us to request that a Relationship Manager contact you.
The foregoing information is provided by City National Bank (CNB). Unless otherwise stated, opinions expressed are those of the respective authors and not necessarily those of CNB. The information is provided without warranty and no recommendation or endorsement by CNB is intended or should be inferred unless specifically stated.
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