Business Receivables by Ken Mahoney

This is an article that appeared in the Rockland Business Digest a couple issues ago.

For many businesses, receivables are what keep a healthy company moving forward and an unhealthy company scrambling to make ends meet. You’re working in your business, instead of working on your business and often don’t manage your accounts properly: late payments and delinquent accounts can pile up, leading to cash flow problems. It can happen to any business.

The flow of accounts receivable is the lifeblood of every business, and turning the accounts receivable into cash is critical for reducing working capital requirements. It’s been suggested that one out of five small business fail, due primarily from bad debt. So companies that can manage their receivables and plan 'around them' have a competitive advantage.

According to American Express, the Commercial Collection Agency Association found that nearly 27% of accounts that are three months past due will never be collected. That figure jumps to 44% after six months, and after a year, the probability of not collecting an overdue account hits nearly 75%. But how do you as business owner manage your receivables? What if you had zero in receivables? Would you reinvest in more into your company?

One of the best ways to avoid long accounts receivable timelines is by doing due diligence on your customers up front. Some owners tell me that they handle the receivables by asking for credit cards up front for their products or services. This way they companies can have more control over their receivables. But what if a potential client does not want to work this way?

Other companies have asked for credit references before entering into an agreement with a new client. Though some owners expressed concerns over this concept. They don't want potential customers to feel as if they are over- bearing.

So what is the right balance of getting to know the new client, but without being too aggressive? One local business owner had this to say: “We keep track of our receivable to make sure it doesn't go past due, keep an eye out for chargebacks or discounts to the receivables, and make collection calls on the receivable if something goes wrong.”

By combining early due diligence with close attention to aging receivables and using strategies like keeping backup credit card numbers on file, small-business owners can get a handle on their account receivables and keep their bottom lines healthy, even when customers are dealing with their own problems.

Here are a few strategies to help deal with receivables:

• Document all transactions in writing. You may have a great relationship, but an oral agreement will end up costing you money. You may be reluctant to take any step that interferes with the selling relationship, but this will serve you well.

• Evaluate your payment practices: Take a look at how your clients and customers have been doing on payments during the last 18 to 24 months. It will give you an idea of which need greater control. In the area of late payment, your analysis may lead you to suggest a program of communication with habitually late accounts beginning on the first day after the payment terms expire in order to alert the client/customer that payment is expected when due.

• Set payment for the same time each month: Instead of billing upon a project or sale is complete, send out all bills the same day of each month.

• Make sure your customers have a copy of your payment terms, either on your invoice or contract or some other sales document. RBD