NFIB

Stay on Top of Cash Flow: Review Accounts Receivable
07/ 23/ 2002

Many small businesses assign accounts receivable to bookkeeping, which usually leads to the company owner not scheduling regular reviews of customer payments. But to stay on top of cash flow, the true head of accounts receivable should be the company's owner. Jeffrey Moses explains in today's Workshop.

To say that the company owner should handle accounts receivable implies that few things are more important for the success of a business than regularly reviewing the status of payments and payment schedules. Too often, small companies let payments string out 60, 90 or even 120 days. This can put a strain on cash flow.

When reviewing how accounts receivable affects your cash flow, the following points should be considered:

1. The length of time the account has become accustomed to paying.

If payment schedules were once a true "net 30" but have gradually stretched to 120 days or more, call the appropriate individual at the customer's business and work out a more timely payment schedule. (Many larger companies, of course, operate on 120 days as a norm. Explain to them that as a small supplier, this sometimes puts a strain on your cash flow and schedules of 45 or 60 days would be preferable.)

2. Occasional lapses in payment.

When an account occasionally doesn't pay for four, five or six months, this could indicate financial difficulties. In such cases, large projects should not be started for the customer (or large shipments of products sent) unless advanced payment is received. Otherwise, there is a risk that the customer will go out of business without payment being made.

3. Frequent requests to make partial payments.

As in the point above, this could indicate financial difficulties on the part of the customer.

4. "The check's in the mail."

When your accounts actually claim that payment has been made when it has not, the ultimate red flag has been waived. Attention should be put on receiving payments due, and before any additional work or product shipments are undertaken, advanced payment should be received.

Reviewing accounts receivable can result in finding out good things about your customers, such as which ones have maintained an excellent payment record. In such instances, consider offering incentives to increase the business the customer throws your way. For example, offer to extend payment schedules for larger dollar volumes of purchases or services, or increase goodwill by offering one-time discounts for purchases or services even when such discounts are not expected.

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