Almost any small business can use advice on how to improve its collection cycle. The first line of defense against late payments is a complete invoice. Your bills should be accurate, detailed and easy to understand. If difficult to understand, then your client will need to call for additional information. That translates into you have been added to their to-do list, which increases the time of your collection cycle. Include on each invoice:
??Your companys contact information: name, address, tax id number, phone and contact person ??The date the invoice was prepared ??The customers name and address ??A description of the goods or services sold to the customer - itemize, if possible (An itemized bill is harder to contest.) ??The amount due, with sales tax amount broken out ??When the invoice is due
Once prepared, send invoices promptly. Another piece of small business advice is the longer you take to bill a customer the less likely you are to receive payment for the goods and services provided.
Many of my business mentoring clients are surprised to learn that the step requiring the most amount of time in the cash conversion process is the time it takes to collect on a customer account. The cash conversion process begins the moment they make contact with the customer, and ends when they have received and deposited payment from that customer; hopefully this cycle repeats itself each month.
The time it takes my business mentoring clients to collect their accounts receivable is measured by the average accounts receivable collection period. The average accounts receivable collection period is an important indicator for determining when their business will be paid for the goods and services it provides.
This simple calculation gives you a powerful tracking tool that helps you adjust your cash in-flow on an as-needed basis:
Step 1: Calculate your average collection period by dividing your total sales for the previous year by 365. This gives you your average daily sales volume. (Total Sales / 365 Days = Average Daily Sales Volume)
Step 2: Then divide your average daily sales volume into your current accounts receivable balance to get the number of days it takes to collect a bill. (Average Accounts Receivable Collection Period = Average Daily Sales Volume / Current Accounts Receivable Balance)
Now that you know your average accounts receivable collection period, you then need to interpret that number as it relates to your business by asking four important bookkeeping service questions.
Bookkeeping Service Question #1: Is your average accounts receivable collection period in line with the companys credit policy? If your credit terms provide your customers with 30 days to pay their bills, then you should expect that your average collection period will be somewhere around 30 days - maybe a little longer. If your average collection period is 60 days then you need to examine other factors that affect billing.
Bookkeeping Service Question #2: Are you billing your customers consistently? Look at your Accounts Receivable Aging Report, the report that summarizes all of your outstanding invoices by client and number of days outstanding. Are the outstanding invoices on that report related to products and services sold within the last 45 days, or are they related to products and services you provided three months ago and just got around to billing? Create a procedure to bill customers once a week or each time you have a completed sale.
Bookkeeping Service Question #3: Are you billing your customers effectively? Are your customers calling you with questions about your invoice? Perhaps you didnt have that important upfront conversation with your client about how you charge for your products and services. By having this conversation, confusion and anxiety over wondering if the customer is going to pay you can be eliminated.
Bookkeeping Service Question #4: Are you tracking overdue accounts and taking consistent action to collect past due accounts? Do you have an effective tool in place to track when an account comes due, and knowing who has paid their bills and who has not? When a customers invoice goes past its due date, is there a procedure in place to follow-up with that customer? Sometimes sending customer statements and making friendly reminder calls is all it takes.
By answering these four basic questions, implementing a few bookkeeping service procedures and heeding this small business advice, youll soon be running a fine-tuned collection machine.
For small and medium businesses or those which are in their growing stages, to obtain finances is a very tough task. Bank loans are not easily provided to such organizations as they take into consideration factors like number of years in business, assets and other factors. Moreover getting a loan is a time consuming process. In situations, where organizations have customers who pay in a period of 30 to 60 days or more, managing funds becomes difficult. They may miss out on an opportunity to attain new business merely due to lack of funds. This in turn leads to financial losses, as well as further opportunities to grow.
Additionally, regular expenses like rents, wages etc., which are unavoidable, need to be taken care of. So money gets help up because of the slow paying customers. In such a scenario, can a business deliver the larger orders of larger customers and provide them larger credits for 60-90 days? The solution for this lies in accounts receivable financing. Accounts receivable financing provides you with immediate cash against collateral of your accounts receivables. The only criterion here is that your customers must be credit worthy. Some companies would even provide you with finance even if you do not have hard collateral but have good invoices, with good profit margins and a great business plan.
Accounts receivable finance allows a great way to increase profits. Initially you may feel what is left for you if you are earning 5% profits and are paying around 4% to the finance company? However, because of finances being available at the right time, you will not miss an opportunity to get bigger contracts. Improved business, leads to higher profit margins and thus an overall increase in profits. Cost of production is reduced in case of higher volumes, though there may be slight rise in certain fixed costs like electricity bills, wages and insurance, which may very slightly affect overall profits.
Moreover as your business grows you have more invoices which you can use as collateral to avail loans from such accounts receivable financing companies. When you take a loan from the bank it is a one time thing, as compared to the accounts receivable financing where you have continuous loans of amounts as and when you require them. At the end of the year you have no debt left.
When you use the accounts receivable financing you assume that the customer would take the stipulated period of 30-60 days to pay the bill. However if the customer pays later than that, then when you are applying for finance you can see to it that the invoice is 30 days old or so, so that you pay fees for 30 days only. Another thing you may do is use the faster paying customers first for your urgent cash needs. As the responsibility of collecting the invoices is upon you, it often leads to bringing about more discipline in business management. With the financing companies guidance you may also put your finances in order and choose those customers who have good credit ratings or get government contracts.
Accounts receivable financing thus helps increase profits which is a major factor in the growth of any business.
Both Ben Needles & Kris Koonar are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Ben Needles has sinced written about articles on various topics from Business Credit Cards, Anger Control and Business Credit Cards. About the Author (text)Linda Hunt and Laurie O'Neil are the co-founders of The Bookkeeper's Referral Network Inc., the place where business meets great bookkeepers. To get your copy of The 9 Disastrous Mistakes Most Freelance Bookkeepe. Ben Needles's top article generates over 550000 views. to your Favourites.
Kris Koonar has sinced written about articles on various topics from Site Promotion, Certified Public Accountants and Culture and Society. can help your trucking company grow. Get cash instantly without taking out a loan. To learn more ab. Kris Koonar's top article generates over 550000 views. to your Favourites.