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    Categories: Accounting

Here’s What You Need to Know About Accounts Receivable

Black African American Coffee Shop Employee Accepts a Pre-Order on a Mobile Phone Call and Writes it Down on Laptop Computer in a Cafe. Restaurant Manager Browsing Internet and Talking on Smartphone.

For years we’ve been led to believe that billing and collecting is just a normal part of doing business. We’ve also been told that receivables count as assets, that they represent the money customers owe you in exchange for products or services. Banks lend money based on receivables. Valuations of businesses increase related to the amount of receivables. Having a “healthy balance sheet” includes the fact that you’ve got a reasonable amount of accounts receivable on your books.

Since the dawn of business, people have owed each other money. Work is performed. An invoice is sent. Thirty days go by, and — if you’re lucky — you receive payment. Meanwhile, you’ve already bought the materials, paid your people and incurred the overhead required to do the work or make the product. You’re always behind when you have receivables.

This is why receivables aren’t good. They’re not cash. They’re a drain on resources every minute they remain outstanding. Being owed money isn’t enviable. Having the money in your bank account is what you want. Your job is to lower your open receivables to the lowest amount possible, if not eliminating them altogether.

Yeah, receivables are so 1990. Let’s move to 2021. Have you changed your billing and collection processes for today’s business environment?

Do you take credit cards or accept online payments?

You should be. Sure, there are fees. But those fees are a cost of doing business in 2021. So do what every big company does and pass these fees on to your customers. Charge extra or build in those fees to your overhead and adjust pricing a tick or two across the board. As interest rates and inflation rise, the lack of money in the back plus the time you spend trying to collect overdue payments is likely costing you more than what the credit card companies charge you in transaction fees.

Do you require deposits, upfront payments or retainers?

Many companies I know do this now, especially with new customers that aren’t familiar with old practices. Even getting a third of what’s owed in advance will cover the majority of your overhead and take away some frustration from the collection process.

Do you bill immediately and include online payment options on your invoice?

Please don’t tell me you do your billing once a week. That’s like giving money away. Billing should be done daily using email (not snail mail), and the electronic invoice should also include a link to a method for customers to pay with their credit card. Again, get the money.

Have you invested in collections?

If you’re still billing and collecting (and many of us still are), then are you putting the right resources behind your collection efforts? I have an outsourced bookkeeper who does it all for me, and I couldn’t be happier mainly because I’m not involved. She has reminders set up in her calendar. She emails gentle reminders to customers — particularly known slow payers — well in advance of the due date. She’s firm and persistent and professional. But when she’s ignored long enough, she turns into an animal, so watch out.

Do you leverage your receivables?

Many financial service providers — from PayPal to Square to traditional banks — will provide working capital based on your receivables. With it, you’ve got a line of credit available, which is equivalent to cash, that you can use and apply received funds directly against what you’ve drawn. This is exactly what banks and their ilk do and why they’re so important. Yes, there are fees and interest, so see what to do about that above.

Finally, do you measure your receivables?

Try this simple measure called Days Sales Outstanding (DSO). To calculate, take your open accounts receivable at the end of a month and divide it by non-cash sales during the month. Then, multiply by the number of days in the month. So in an extreme example, if sales were $1,000,000 in March and receivables at the end of the month are $1,000,000, then your DSO is 31 days. It makes sense because you haven’t collected anything! And if you sold another $1,000,000 in April, and your receivables at the end of the month was $2,000,000, then your DSO is 61 days. You’re carrying two months of receivables. Not good. It should ideally be less than 45 days.

Am I missing anything? Is there something you’re doing to minimize your receivables and quickly get cash in the bank? Please share in the comments, and I’ll join in.

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Chloe Silverman:
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