You know that no matter what the accounting gurus tell you that a sale does not take place until the payment for your product or service is safely in your bank account. That is why it is SO important that you develop, implement and maintain an effective accounts receivable collection process.Accounts receivable represent sales that have not yet been collected as cash. You sell your products or services without collecting cash, Sikkens stain instead relying upon your customers' promise to pay within the time parameters that you have set up. In other words, you are extending credit to your customer. If you normally make sales on credit, then your accounts receivable and the proper management of those receivables becomes crucial to your cash flow.
If you have planned well and if your customers pay on time, then you will have few problems. However, the likelihood that you will have one or more customers who do not pay on time is very high. It is in these cases where your cash flow can be severely damaged, leaving you short of cash when it comes time to pay your own bills.
This is a common occurrence in many small businesses, but can be avoided with the proper planning and execution of a well thought out process or system. In addition, accounts receivable are also considered an investment, meaning that any cash belonging to the business that is carried in accounts receivable is not available for immediate use. This can cause problems with your accounts payable, monthly bills, loan payments, etc. if you lack proper control. There may even be a discount for accounts paid early. Of course, this needs to be factored into your pricing policy.
The reason why any business would make such an investment is the belief that carrying your customers on credit will create enough additional sales to offset any expenses or losses associated with collecting from the few customers that will be slow or not pay at all.
There are many different accounting tools that you can use to determine how your current system is performing, but these are probably your most important:
1) Average collection period-This is the average time it takes between the sale of your product or service and the collection of your payment on credit sales only. If your average is at or above the terms of payment, then you need to examine and change either your terms or your collection procedures.
2) Accounts Receivable to Sales Ratio-If this percentage exceeds the ratio of credit sales to sales, then you have a problem and should examine your procedures.
3) Accounts Receivable Aging Schedule-This is a vital piece of information as it allows you to track on a continual basis both the individual customers who are delinquent, and the total number and dollar amount of past dues. Many small businesses are shocked when they take a look at this for the first time. Remember that these are simply analysis tools to let you know how well your process is working or not working. If you don't currently have a system or a process for collecting your receivables, or if your system is not performing as well as you would like, you are most likely struggling with your cash flow. While the gurus love profit, cash flow is still king!
Do you currently have a system in place? Do you have a member of your team designated to handle this task? (This certainly does not mean that this must be his/her sole responsibility, only that it be one of his/her responsibilities) Do you have a schedule for each contact? Do you have phone scripts? Letter templates? Are you employing the three F's?
These are all vital parts of any accounts receivable collection process. You can have all but one and your results will suffer. You need them all and you need to do them in proper succession. Make certain that you have all of the above and you will soon see a DRAMATIC increase in your collection results!
Greg Beverly, CPA, MBA has more than 21 years experience helping thousands of businesses increase profits and cash flow. Having developed his own proprietary system for collecting accounts receivable through necessity, he has shown others how to avoid the cash flow crunch. As an author, teacher, mentor and helper, he desires to see everyone reach their true potential. You can learn how to collect your receivables and fatten your bank account by visiting http://www.accountsreceivable.yougethelp.com
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