Small businesses often struggle to maintain ideal cash flow because they fail to optimally manage receivables. The first step in managing receivables is to know exactly what they are.
In its most basic form, receivables are monies owed to the company for goods or services already performed or delivered on credit. This is normally listed as a credit or asset on your account statement, but as you will remember from our article on cash flow, it only really counts when the cash is in your hand.
Businesses are for the most part set up to provide a return on investment to the owner and no successful business can operate without putting money back into it. So whether its to cover staff expenses or utilities, or to buy raw materials to produce goods, there has to be an inflow of money from somewhere. This is usually achieved through sales.
If you took all your cash and produced one hundred items and sold them on credit, how do you go on to produce any more until you have been paid for the goods sold? Managing your receivables allows you to forecast just how far you can go before you have to start putting more money into your company, or better yet collect, monies owing to you. Once you are clear what this number is you are able to create policies to better help you manage your receivables and by extension your cash flow.
Strategies for managing receivables:
- First, establish if you can afford to provide credit and only then do you have to decide a credit policy. Your credit policy should state the criteria your customer has to meet in order to access credit, such as their payment history. It should also outline credit limits and time frames for payment.
- Decide if your customer is a good candidate for credit based on the set criteria for accessing credit. You may however want to evaluate each customer on their own merit to account for any differences in their situations or business.
- Once you have approved a customer, your paperwork should outline the terms and conditions of the credit arrangement and brought to the attention of your customer. Ensure that it includes consequences for late and non payment.
- Invoice like a pro: Ensure that you use an accounting software which allows you to clearly state your credit terms. You can employ different strategies to encourage early payment of invoices like discounts for cash sales or early payments. Pay close attention to the level of detail on your invoices to ensure your client pays you in a timely manner.
- Follow up. Many small business owners are uncomfortable calling customers about money, but it is a fear that must be overcome if you are to remain in business. Some accounting software allows you to send automatic reminders to customers as it draws closer the payment date. If you do not have that option do not be afraid to call to gently remind them that you are expecting payment by a certain date. Remember, the people who call often get paid first.
- When invoices are past due, give the customer a call to find out what the problem is. Work with the customer to come to a mutually beneficial agreement. If it stays outstanding over a long period you may need to consider getting professional help, to collect the outstanding amounts.
- Do not continue to extend additional credit until all outstanding invoices have been paid.
What are some of the challenges you face with managing your receivables and what strategies do you employ to overcome them?
