When companies think of making more money, they automatically think of such things as expanding marketing expenses to ultimately acquire new customers or creating new products to sell. But, what if a company simply had all their customers paying their invoices and in a timely fashion? You say, “I wish that would happen!” Well, it should, and it can with attention given to the important area that we in the accounting realm call accounts receivable.
Accounts receivable refers to money that is owed to a business by its customers for goods or services that have or will be delivered but has not yet been paid. Efficiently collecting accounts receivable is a critical component of running a successful business. Here are some of the main reasons why actively collecting accounts receivable matters:
Improves Cash Flow
Having a large amount of outstanding accounts receivable ties up valuable working capital and restricts cash flow. For example, if a business has $100,000 in uncollected invoices, that restricts their available cash on hand by $100,000. By collecting receivables quicker, businesses can free up capital faster to reinvest in operations, inventory, growth opportunities, payroll, and other expenses. Steady cash flow is the lifeblood of any company.
Reduces Bad Debt Expenses
The longer accounts go unpaid past the due date, the higher the risk of them becoming bad debt and having to be written off. Actively pursuing past due accounts through invoices/statements, phone calls, texts, or collection agencies can help minimize this risk and reduce bad debt expenses. The sooner customers pay, the less likely the receivables turn into uncollectible debts.
Strengthens Financial Performance
Efficient receivables collection improves a company’s key financial ratios like the current ratio and days sales outstanding. Current ratio specifically measures a company’s ability to pay its short-term liabilities with its current assets. The higher the ratio, the better positioned the company is. Accounts receivable fall under current assets, so collecting them faster improves this ratio. This strengthens the business’s overall financial health and performance. Creditors and investors will also view the company more favorably with faster accounts receivable turnover.
Enhances Customer Relationships
By setting clear payment terms upfront and diligently following up on late payments, companies can keep customers in the know and set expectations. For example, sending reminders when payments are 3, 10, 20 days late keeps customers informed. Offering minor discounts for customers who pay invoices early is another technique. This promotes customer satisfaction and strengthens business relationships over the long-term. Communicating early and often is key.
Consequences of Not Collecting
If companies do not prioritize collecting accounts receivable, they risk revenue losses, cash flow shortages, higher operating costs from bad debts, and even business failure. Collection is not simply a financial process, but a customer service skill. It is necessary for the success of a business. Businesses should utilize invoices/statements, phone calls, texts, emails, and in-person meetings to collect from customers. The time invested leads to a healthy business.
Best Practices
To efficiently manage accounts receivable, we recommend sending invoices quickly, automating reminders about due dates, providing incentives for early payment, accepting multiple payment options, using accounting software to track records, and most importantly, setting clear and concise procedures for how to handle accounts receivable. These procedures should be handled the same for each customer. If you are selling a service, a cancellation policy is very important to implement as well so that services are not continuing to be done, that are not being paid for. Outsourcing collections is another option if in-house efforts are unsuccessful, and we at Studio98 can help with this. We would love to come alongside you with our Bookkeeping Services to better help you manage your financials and in this case accounts receivables. For instance, sometimes it is hard for someone with a business that wants to focus on growing the company to be able to focus on collecting accounts receivable. This is why we are here to help.
In summary, actively collecting accounts receivable has a major impact on cash flow, expenses, financial ratios, customer service, and a company’s bottom line. By making collection a priority, businesses will strengthen their financial foundation and ultimately MAKE MORE MONEY.
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