If you’ve been suffering from a lack of income, and can’t quite seem to figure out why you’re having cash flow problems- it’s probably time to take a closer look at your Accounts Receivable. Practicing Receivables Management can make the difference of succeeding or going out of business! Over 50% of small businesses have troubling collecting payments, either at all or on time, and it throws a major wrench into their business’ financial health. Practicing receivables management is the #1 way small businesses can improve their cash flow and better plan and forecast their finances.
Here are some tell-tale signs that your business does not have a healthy Accounts Receivable.
Psst! Want to skip straight to the part? Use this free Receivables Fit or Not calculator!
1. Your DSO is sky-high or constantly in flux.
Having long DSOs (days sales outstanding) means your business is making a habit of offering credit, which can be quite risky. The longer you wait to collect payment due, the greater the risk you won’t successfully collect. Having long or fluctuating DSO also means you cannot accurately plan for financial activities like business or structural improvements. Some variation in DSO is normal, and companies should expect at least some days outstanding – however very large DSOs or wide-ranging DSOs are definitely huge signs of not having a healthy Accounts Receivable. DSO should not exceed terms by more than a third to a half.
Small businesses should also be tracking their average days delinquent (ADD), which calculates the average time from the invoice due date to the paid date.
(Current Total Receivables / Total Credit Sales for the Period) x Number of Days in Period
Step #1 Calculate average Days sales outstanding (DSO)
DSO = (Average AR / Billed Revenue) x Days
Step #2 Calculate Best Possible DSO
Best Possible DSO = (Current AR / Billed Revenue) x Days
Step #3 Calculate Average Days Delinquent
ADD= Days Sales Outstanding – Best Possible Days Sales Outstanding
2. You know you have payments due to you, but you just aren’t exactly sure how much and from whom.
You should be tracking which invoices are due each and every month. You should track who is due, or past due. You should track multiple invoices so when you’re making the effort to collect a payment, you can mention any other outstanding balances as well.
You should absolutely make a note of who frequently pays late, and who has skipped a payment- these are not healthy business relationships.
3. You have no credit policy
Small businesses who operate using payment terms should have a set policy in place to evaluate possible new customers. Just because someone is willing to use your business, does not mean you should immediately accept them- especially when credit it involved. Do a background check, a credit check, and be alert to industries prone to late payments.
4. You have trouble keeping track of your payment communication.
Maintaining a healthy Accounts Receivable means maintaining healthy customer and client relationships. Tracking communication is vital to AR management. One of the most important aspects of successful payment collection is being able to accurate cite previous agreements and conversations. You should leave no wiggle room! It’s important to distinguish between customers who simply haven’t been alerted to their late payment from customers who are actively ignoring your payment reminders. If you need to send a business to collections, or end up taking them to court, having a documented communication history will greatly aid your chances of success.
5. You are great friends with your preferred collection agency.
Do you frequently have to send invoices or companies to collections? Then you have an AR problem! You can avoid the fees and loss of income by staying on top of your late payments and taking effective actions to collect payment (practicing receivables management)!
6. You use, or are considering using, Invoice Factoring.
Need cash fast, as they say? Well you wouldn’t have cash problems to begin with if you practiced receivables management. Remaining organized and taking effective action to collect will allow you to receive payments consistently on time. This will prevent you from feeling cash-strapped, and reporting to invoice factoring. There’s no need to sacrifice your earned income!
7. No one is in charge of your Accounts Receivable.
Who’s job is it to track incoming payments, and payments due? No one? Your AR could probably use a lot of work if no one has even been monitoring it. Don’t worry- you don’t have to rush out a hire someone! AR Management platforms like the FG Receivables Manager are easy to add to any employee’s workflow- even the office manager or secretary! You can also utilize your, or another, accountant for Receivables Management services.
8. Your payment reminders, or collection letters, are all for invoices 90 days late (or later!)
You need to be following up sooner, much sooner! With each 30 day block, you need to send a different, more serious collection letter. Check out this free guide to the 4 communication strategies you should be employing for late paying customers.
9. You have more late payments than others in your industry
If you have more late payers than other businesses in your industry, or it takes you longer than others in your industry to receive payments – you probably need to improve your AR management.
How can you tell? Use this free Receivables Fit or Not calculator!
Do you think you have an AR problem? As AR experts, we’d be happy to give you a free consultation. Just get in touch with us (use that chat window to your left!). Feel free to share stories in the comments of how you maintain a healthy Accounts Receivable!