Where's the Cash? Look at Your Receivables

     However, we cannot use sales as a form of payment. This is important because, too often, business owners make the mistake of thinking that once a sale is made, they have cash to spend. While this is true if your sales are on a cash basis (assuming you receive the cash at the time of the sale), if you sell on credit you must always remember the old adage: there is no sale until the money is in the bank.

     It is a saying you forget at your own peril. Those who cannot remember find themselves “asset-rich and cash poor.” In this case the asset is your accounts receivable. When this happens to you, you will find yourself in a situation where your business is thriving, yet you cannot meet your daily operational expenses.

     Maybe this has already happened to you. If so, are you frustrated because you continue to sell your product or service, maybe even to grow your business, but you still struggle to pay your bills when they are due? Why is it that you do not have enough money on hand even though sales are good?

     To find the answer, you have to look at your collection process (I am assuming you have a good credit policy in place and that you follow your policy guidelines when extending credit to your customers). Once we close a sale, our focus tends to be on closing the next one, not following up on the one just completed. We assume that we will collect the customer’s payment in due course, so we tend not to worry about it too much.

     Instead, we most often worry about a customer’s payment only when the customer fails to make the payment on time. Interestingly, it is a shortage of cash that makes us realize the customer is late. That is backwards. You should be monitoring your cash flow weekly, if not daily, so you know ahead of time that you will be short of cash.

     So what can you do to squeeze a little more cash out of your accounts receivable? Here are some things to consider:

• Do you call the customer before the payment is due to ensure there are no problems? If you do not deliver as promised, customers will not pay—and they won’t always call you to fix the problem. Instead, they will just wait for you to call them. So call your customer after delivery, or at least a few days before the bill is due, to make sure that they are satisfied with your service.
• Do you allow customers to give themselves a credit if they dispute the amount they owe you? Often, if a customer feels you have overcharged, they will deduct the overage from the amount they owe, and send you the net amount. This is not a practice you should allow. Not only does it affect your cash flow, but it in the long term it unnecessarily complicates your accounting records and the problem resolution process.
• Do you have a process for ensuring that your invoices are prepared correctly and on a timely basis? Anything you can do to shorten the time between delivery of product and service and submission of an invoice will help you get paid sooner.
• Do you bill the customer once you have completed the service or delivered the product? Or do you just bill the customer once a month? In most cases, a monthly billing is sufficient. However, if you have just completed an unusually large order, it is not only appropriate, but necessary, for you to bill the customer as soon as possible. In such cases, you have likely incurred significant, extraordinary expenses yourself, and will owe money to vendors who may not be interested in waiting until your customers pay you.
• Do you always submit your bill in time to meet your customer’s internal deadlines? Many companies only cut checks to pay invoices on specific days of the month. If your invoice arrives after that date, too bad for you. You just have to wait 30 days for the next payment date to get your money. This is especially true if you are selling to very large companies.
• Do you prepare an accounts receivable aging and are you diligent about following up on delinquent accounts? Resolve to do something about delinquent accounts, even if it means that you must collect less than 100% of what is due. Ultimately, any cash you receive is more than you have now, and part of something is better than 100% of nothing. Also, remember that if you have a credit line to finance accounts receivable, no lender will give you credit for anything that is more than 90 days past due, so it is imperative that you stay on top of delinquent accounts until they are paid.