The idea that cash is king has been around a long time. For small to mid-sized businesses, a healthy cash flow is foundational. Sales are important to this equation of increasing the amount of cash on hand, but there may be an untapped cash reservoir in your Accounts Receivables. Due to the challenging and time-consuming nature, collection efforts are often neglected until receivables are 90 days or longer past due. Sometimes, it decided that it’s just easier to write off old receivables as uncollected. This can significantly impact your company’s cash flow and profits. Here are some ways you can handle your already past-due accounts:
- Create an Accounts Receivable Aging Report. In Microsoft Dynamics GP, you can use SmartList Builder to create an aging report that will track the payment status of your customers by time period and the amounts due so you can easily spot potential problems. You can also setup reminders to notify you when certain “rules” are broken (see my blog to find out how).
- Act Quickly. Studies have shown that the probability of collecting receivables drops dramatically as time passes – 90% within 30 days; 74% after 90 days; and 50% after six months. If your terms are net-30 days and the payment hasn’t arrived on day 31, you should be on the phone providing your customer with a friendly reminder.
- Consider a Payment Plan. If a customer is struggling to make payments, a simple and straightforward payment plan could save the relationship and put the money back in your company’s account faster.
- Send Past-Due Letters. If courtesy calls and an offer of a payment plan do not bring in the money, it’s time to get a little tougher. Use firm, but nonthreatening language. For example, “I’m following up on my phone messages in writing to make you aware of the past-due status of this invoice. Please remit payment at once or contact me if you have any questions.”
- Call in the Cavalry.If you’ve still received no response after 90 or perhaps 120 days, send a final notice informing the customer that if payment is not received within x days (no more than 7), the account will be turned over to a collection agency. Then follow through on this action if you have to. (Please note that contacting a collection agency should not be taken lightly as it will probably threaten your future relationship with the customer.)
- Accounts Receivable Turnover shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash the client generally has on hand.
Accounts Receivable Turnover = Total Net Sales / Accounts Receivable
- Accounts Receivable Collection Period reveals how many days it takes to collect all accounts receivable. As with accounts receivable turnover (above), fewer days means the company is collecting more quickly on its accounts.
Accounts Receivable Collection Period = 365 days / Accounts Receivable Turnover If your management of your accounts receivable isn’t where you would like it, here are some things you can do to minimize the number of past-due accounts you have on your books:
- Establish or revisit your Accounts Receivable Policy
- Turn away customers that you know won’t have the funds to pay
- Put a Due Date on the bill
- Charge late fees
- Provide friendly reminders with a phone call
- Setup a process for reviewing your invoices
Being intentional with how you manage your accounts receivable can pay significant dividends to your monthly cash flow. If you are interested in how you can use Microsoft Dynamics GP to assist you, please leave a comment below.