Imagine having more than 1 out of every 3 dollars you’ve earned 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 40 percent or more of their assets tied up in accounts receivable. Obviously, when it comes to money that your clients are owed, they want to collect as quickly as possible.
A financial statement analysis by Sageworks, a leader in the financial analysis of privately held companies, 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 businesses can do to minimize late payments.
By giving your clients the following tips you’ll help them put more money in their pocket faster, and you will help cement your status as a
trusted business advisor:
- Examine your credit policy. Often there is no good reason to treat all customers the same when it comes to credit. Tell your clients to consider extending different credit terms to different customers based on creditworthiness and the overall relationship involved. That allows your clients to better reflect the level of risk they are accepting. In fact, your clients should be selective in providing any credit at all. Giving credit should be done to increase revenues and income. If it’s not, you should work with your clients to revise their policy.
- Don’t be afraid to ask. The biggest hurdle 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 someone simply because they ask them to pay their bill. In fact, a customer’s attitude about paying in a timely fashion is often directly correlated to your clients’ attitude in asking for payment. If your clients are hesitant to ask or nonchalant -- or non-existent -- in their approach, their customers will feel no urgency in getting it paid. Businesses do not usually need to be aggressive; they just need to ask.
- Check yourself. Nothing delays payment from a customer more than sending out an incorrect invoice. Tell your clients to monitor their invoicing procedures to ensure accuracy. By pulling frequent (weekly) reports on your accounts receivable, your clients will see how effective the business is at collecting funds, and they’ll be more aware of overdue accounts.
- Apply and collect late fees when possible. In a lot of small businesses, there are no consequences for late payment. But late payments cost businesses money -- in opportunity costs, labor costs to collect, etc. Why should your clients 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. Businesses don’t usually need to be aggressive in their approach. Your clients should simply provide a tangible consequence for not paying on time. Customers not only accept this; they expect it. Try paying your electric bill late!
In everything, remind your clients that receiving payments at the rate that services or goods are provided is ideal. By actively managing payables AND receivables, your clients can have a direct impact on their cash flow.
Michael McNeilly, Vice President, Accounting and Financial Institutions Markets, Sageworks Inc.
Mary Ellen Biery contributed to this article.
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