Most customers do…with your permission! I’ll bet you are too and you don’t even realize it. More on that in a moment…

Accounts Receivables: Is this maybe the most boring topic known to man (or woman)?

I get it. But hear me out.

I had a client send me this the other day:

Patty, We used to have an Accounts Receivables issue. Thank you & your crew for helping us clean up our AR. We are better able to see our open invoices and more aggressively work to collect old receivables. As you say, you helped us “clean up the noise” so we can stay focused on trying to collect the older balances and not let the current invoices go out too late.

And it got me thinking…a lot of business owners don’t realize that their customers are using them as a bank.

Are yours?

Here’s what I mean by that. You’ve completed work with a client, sent them an invoice, and now wait for them to pay. You’ve given them 10, 30, 60, 90, however many days to pay you for the work that you’ve done. And you’ve already paid your employees for doing the work. And paid for the materials or inventory required for that job. And paid for the product that you just sold that customer.

People don’t often realize this, but that is an interest-free loan you’ve given to your customer.

When you give terms to your customers and don’t get paid as soon as you render your services or sell products, you’re extending credit to your customers.

Business owners will often say to me, “But my business is profitable, so why not?”

My pushback to them is that it’s cash flow you’re looking at, not profitability. These are two completely different aspects of your company’s financial picture. If you run out of cash, you can go out of business. Your bottom line can show a profit, but you can still grow yourself out of cash.

Extending credit to your customers puts you in the business of being a banker. And if you wanted to be a banker, you would be working in a bank, am I right?

When you do this, you have to manage it. You’ve extended credit, so you have to manage that process (what I call managing your receivables) until you get the cash back into your bank account.

The other thing to be aware of in the realm of cash flow is your company’s cash cycle – the time it takes to convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash. As it relates to accounts receivable, we want to shorten the time it takes to collect the cash from services rendered or product sold. In the bigger picture, your goal is to have your number of days of outstanding receivables be shorter than your number of days of outstanding payables. As in, you’re getting money in more quickly (from receivables) than it’s going out the door to pay your bills.

Otherwise, you might have to borrow from your bank to fund operations and be charged interest to pay your bills, while your customers get a free ride as they owe you money! Money you might really need to help fuel your business.

That’s why you want to try to compress that cash cycle as much as you can.

Why do we need to pay attention to this? Because typically, accounts receivables are the largest or second largest item on a company’s balance sheet. Such a large amount of money doesn’t manage itself, and the older invoices are the harder they become to collect.

Unlike a fine wine that ages gracefully and gets better with age, invoices do not.

Remember: cash is king. It gives you options. So you need to make sure you have it in your account rather than it being in someone else’s account because you let them hang on to it; you need it to fuel the growth of your business. The more cash you have, the more opportunities you have to grow your business.

With that in mind, here are 5 things you can put in place to manage your accounts receivable so you have more cash and more options.

1. Get a credit policy. If you don’t have one, you need one. A credit policy determines who gets what kind of credit and how much, who you extend credit to, and how you evaluate it. What financial information do you require of your customers to prove that they are worthy of extending credit and are good for paying it back, and how do you evaluate or score that information?

2. Set the right terms for customers. You want to set terms that are appropriate within your industry. From a cash cycle standpoint, obviously shorter is better. Be aware that the longer your terms, the more cash starved your business might become. Better to make payment terms shorter and provide exceptions, than to make them long for everyone. Choose wisely.

3. Make it easy for customers to pay you. Give them a few options, not too many, but enough. You could accept electronic transfers, credit cards, checks, e-checks, ACH, PayPal, Square, or other payment methods to make it easy for customers to pay you without breaking the bank for you.

4. Make your customers want to pay you early and on time. Create a structure such as incentives, bonuses, rewards, or a loyalty program that makes customers want to pay you early and on time. Just make sure your reward is more like the carrot than the stick, because you want to retain those customers…not deter them from working with you again by hitting them with a stick!

5. Keep tabs on where your receivables are. Pay attention to your reports and what they’re telling you. There are accounts receivable aging reports on nearly every accounting system out there that tell you what’s current and what’s not. For the people that are beyond their terms, they need a follow-up so they know that you’re watching. The squeaky wheel gets the grease, and unfortunately some customers just won’t do anything until they’re prompted.

The bottom line is this: don’t be the bank. Make sure your customers pay you and are happy to do so for the good job you do for them. And if not…call me, because I know how to get you there!