When you think about business funding what comes to mind? A loan from the bank? Tapping personal credit cards? Using your own savings? Some kind of specialized cash flow financing?
Account receivables management probably isn’t on your list. Many companies could reduce the amount of financing they need or eliminate their debt completely if they managed their accounts receivable better.
Cash Or Credit?
Dollars tied up in accounts receivable are dollars that don’t help you run your business. With that thought in mind, account receivables management is simply a function of moving from sales to AR to cash as quickly as possible.
As a business owner, you should prefer that your customers pay up front in cash. Now, with most businesses this would never work. Paying up front in cash is the last thing your customers want to do. They want an invoice with 30, 60 or 90 day terms.
You invoice your customers as a service to them. There’s nothing in it for you. Managing accounts receivable costs time and money.
Your customers love that they get your product or service today and then pay in 60 days. But you have to wait 60 days before you get the cash from that sale. That time, plus the staff needed to manage the accounting process, costs money.
All of this is to say that the quicker sales are converted to cash the less need there is for outside business funding.
Speeding Up Collections
A good receivables process has three pillars -- when you invoice, terms you offer and how you handle past due amounts.
Invoice Quickly
The quicker you invoice the quicker you get paid. You should have an invoice in the mail the same day you make a sale.
Don’t wait until the end of the week or the end of the month to send out invoices. In many customers’ eyes, the clock starts ticking when they receive the invoice. If you wait two weeks to send the invoice and offer 30-day terms -- it may end up taking 45 days for you to be paid.
Set Conservative Terms
If you give your customers 90 days to pay, they’re going to take 90 days to pay. Make your terms as tight as possible. In most industries, 30 days is the norm.
Unless it causes you to lose business, don’t give your customers more than 30 days to pay.
Don’t forget that you’re extending credit. Your product just walked out the door. How confident are you that they will come back in four weeks to pay for it? Do you think you’re taking more risk if you’re telling them to come back in three months to pay for it? You bet you are!
Conservative terms are just as much about cash flow as they are risk management.
Stay On Top Of Past Due Invoices
If you haven’t received payment, you should be on the phone the first day the unpaid invoice is late. The way you respond sets your customers’ expectations. If you take two weeks to follow up and then tell them to “just pay it when you can”, who do you think is going to be at the bottom of the priority list?
You don’t need to be rude, but you should be firm. A customer should know that you expect invoices to be paid on time.
Invoicing quickly, setting conservative terms and staying on top of past due invoices are the foundations of a good accounts receivable processes. And a good account receivables management process is better than any other business funding out there.
Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. Download our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.
