Making it a Priority
Any business owner who seeks to successfully and profitably grow a business knows that having sufficient working capital is a constant struggle. It is a simple fact of business that growth consumes cash and working capital. As more customers and sales are added, your cash and capital are soaked up by higher inventory levels and more employees along with other expenses and investments. One of the major areas of your business that requires additional capital is your receivables.
By nature, most entrepreneurs look to growing sales as a major indicator of their company’s increasing success. However, those entrepreneurs and business owners who survive over the long-term come to qualify that metric with several factors. First, they learn to focus on profitable sales, not merely chalking up a big turnover. Profits are essential and cutting margins to generate sales is a sure path to problems. A second important lesson learned is that sales don’t really count until they become money in the bank.
The failure to focus on such a basic financial ratio as DSO is one of the primary sources of business failure among SMBs. If a business owner or manager does not understand and appreciate the importance of tightly managing accounts receivable or does not place a high priority on debt collection, cash flow problems are virtually guaranteed to impact a company’s financial health.
Rising sales will mean rising levels of accounts receivable. However, it is essential to monitor the measure of DSO, particularly during a period of rapid growth. Your goal is profitable revenue growth, not financing other businesses. While it is easy to lower credit standards to land more customers, those gains can prove both illusory and dangerous to your company. On the other hand, keeping control of what is owed can lower the level of additional working capital you need. Just as importantly, the longer a debt is left uncollected, the more difficult it is to recover what you are owed.
Many business owners end up asking how they can grow and keep their receivables balance under control. Depending on your particular business model, having all customers pay within 60 days is wise and looks good to your bankers and other backers. Debt collection is an essential business function. Here are several tips on keeping control of your receivables.
Establish Your Standards
The Internet makes it very easy today to obtain detailed and accurate information concerning a prospective customer’s credit status. In addition to traditional services such as Dun & Bradstreet, there are now a number of free to low-cost services that provide ways to check on clients. If you deal with larger invoices, you may require a credit application from a customer. One handy tool is a relationship with a factoring company. Even if you only use them for a few of your larger customers and invoices, they are practiced at evaluating any credit risk. Sometimes the best way to solve a credit problem is to not give credit or tightly control it in the first place.
Far too many businesses fail to make it clear to their customers that they expect to be paid by a certain time. The sales invoice should clearly set forth the date that the payment is expected and establish the late payment fees. It is a good discipline and totally acceptable to verify with the customer at the time of the sale that meeting the stated payment schedule won’t be a problem.
Make it Easy to Pay the Bill
Sometimes speeding up payment is a simple matter of making it easy for a customer to remember and remit. Get your invoices out on time and on a clockwork basis. It is really amazing to see how many businesses have an increase in DSO simply because they don’t send out bill and invoices regularly.
Also, it is increasingly easy to provide customers with a multitude of ways to pay. Simply waiting for a “check in the mail” should never be a reason for your accounts receivable to grow. Consider the options of automatic pay, direct deposit, electronic services such as PayPal and Google Checkout, and other methods. Factor in any additional costs you will incur and make sure the customer absorbs at least a part of them.
Weigh the Advantages of Incentives versus Penalties
If you plan ahead, it is very easy to set your pricing to absorb a small discount for invoices being paid on time rather than relying on a distasteful penalty for late payment. Again, depending on your industry, a net 30 or 60 day discount can be more effective than having to turn to less positive procedures that are sometimes necessary for severely delinquent accounts.
Stay involved and you will see your invoices paid more promptly.
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