Managing Receivables Pays Off
As with most businesses, you probably sell on credit and ask your customer to pay an invoice within a set period of time, such as 30 to 60 days. During this time, you are basically loaning money to a customer, and expecting that the customer will pay you back. If the invoice is paid, you’ve cash to run your business. If it’s not, you don’t. Therefore, to be successful at all, you have to be paid on time.
It’s unfortunate that sometimes, getting what you’re owed isn’t always as easy as simply giving the customer an invoice. Almost all businesses have customers who don’t pay or simply pay slowly. If you don’t proactively manage your receivables, you can swiftly deplete ready cash. Here are some ways you can protect your company from delinquent accounts and late payments.
1. Ensure that customers deserve credit. If necessary, perform credit checks and require that applications for credit be finished before you accept orders. If the buy amount is particularly big, you can ask for and review the customer’s financial statements. Set limits for credit and then make sure they’re stuck to.
2. Run aging reports and make sure you review them regularly. Aging reports help you comprehend how your accounts are dispersed; they’ll show you which are less than 30 days old, 30 to 60 days old, 60 to 90 days old, or older. You and your staff should know how to interpret these reports so that you can spot problems early and take care of them. If necessary, assign someone specifically to follow up on problem invoices. The older invoices get, the more difficult they are to get payment for.
3. Send out invoices immediately. The sooner invoices go out, the sooner payments can come in. Your bills should also be detailed, clear and accurate. The more detail you include, the less likely it is that a customer can dispute charges.
4. Use rewards and penalties. Think about including an incentive for prompt payment, such as offering payment terms that provide a 2% discount for payment within 10 days. Your pricing schedule could also include a penalty fee for late payments. Be sure to stay within the limits set by law.
5. Pace your growth. A significant increase in sales can have a massive impact on your company’s receivables and cash needs. Tap into the advice of a seasoned financial professional to develop a strategy for growth; options to take into account might include additional financing, a line of credit at the bank, or price adjustments. You may need to sacrifice some growth to ensure you don’t outpace your ability to pay your bills.
When companies are successful, they’re always looking for new ways to improve Accounts Receivable, because they know that if they do this, they can reap significant financial gains. If you’ve fewer outstanding balances, this can mean fewer bad debt write-offs and greater profitability. In addition, if your portfolio of receivables is well managed, this will help you boost cash flow and enable you to expand your working capital.
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