Feb 13, 2012 08:30
Imagine having more than 1 out of every 3 dollars in your business tied up and inaccessible.
That’s money you can’t use to advertise, to develop new products and services, or to hire employees.
For many business owners, that scenario is a day-to-day reality as they sit with 35 percent or more of their assets tied up in accounts receivable. Obviously, when it comes to money you’re owed, you want to collect as quickly as possible, says Michael W. McNeilly, director of advisory services at financial information company Sageworks.
But as shown in the table below, a financial statement analysis by Sageworks found that several industries have more than one third of their assets tied up in accounts receivable, based on data from the last two years. The issue appears to be particularly notable for construction-related industries. Among the 10 industries with the highest ratios of accounts receivable to assets, five are tied to construction, according to Sageworks’ analysis of financial statements for privately owned companies.
Of course, different industries have varying billing practices and reasons why payments might be delayed. But there are several things Sageworks recommends you do to minimize late payments, putting more money in your pocket faster:
1. Examine your credit policy. Often there is no good reason to treat all customers the same within your business when it comes to credit. Consider extending different credit terms to different customers based on credit-worthiness and the overall relationship involved. That allows you to better reflect the level of risk you are accepting. In fact, you should be selective in providing any credit at all. Giving credit should be done to increase revenues and income. If it’s not, revisit your policy.
2. Don’t be afraid to ask. McNeilly says the biggest hurdle he typically sees for minimizing late payments is the reluctance of business owners to ask for payment out of fear they will offend or alienate their customer or client. “It is a rare occurrence that a customer will choose not to do business with you simply because you ask them to pay their bill,” he says. In fact, a customer’s attitude about paying in a timely fashion is often directly correlated to your attitude in asking for payment. “If you are hesitant to ask or nonchalant -- or non-existent -- in your approach, they will feel no urgency in getting it paid,” according to McNeilly. “You do not usually have to be aggressive; you just need to ask.”
3. Check yourself. Nothing delays payment from a customer more than sending out an incorrect invoice. Monitor your invoicing procedures to ensure accuracy. By pulling frequent (weekly) reports on your accounts receivable, you’ll see how effective the business is at collecting funds, and you’ll be more aware of overdue accounts.
4. Apply and collect late fees when possible. “In a lot of small businesses, there are no consequences for late payment,” McNeilly says. “But late payments cost you money -- in opportunity costs, labor costs to collect, etc. Why should you be left with the burden of shouldering these costs?” Invoices should clearly spell out consequences for late payments, whether it’s a fee or interest. Again, McNeilly says, you don’t usually need to be aggressive in your approach. Simply provide a tangible consequence for not paying on time. Customers not only accept this; they expect it, he says. “Try paying your light bill late!”
In everything, keep in mind that receiving payments at the rate that services or goods are provided is ideal. “By actively managing your payables AND your receivables, you can have a direct impact on your cash flow,” McNeilly says.