Keeping your accounts receivable high may not seem like a big deal. After all, a business needs to pay its bills. And the current ratio—which is calculated by dividing current liabilities by current assets; including accounts receivable, is a basic measure of bill-paying ability.
But customers often seek to improve their own cash flow by delaying payment to vendors, and it's unwise to let accounts receivable grow too high. When a business lets this happen, it can lead to unnecessary financing costs and, in severe cases, a cash crunch that forces closing the doors. If this is happening in your business, it's time to re-examine your accounts receivables practices.
What is Accounts Receivable Financing (A/R financing)
Sometimes known as a ledgered line of credit or invoice financing, is a great solution for breweries that need more funding that is not available from traditional lenders. Many small businesses need additional cash flow to support seasonal demands, growth, business opportunities, or solve a short-term cash need. Accounts receivable financing provides your business with flexible and immediate cash that will give your business the opportunity to grow, restructure, take advantage of supplier discounts, hire additional employees, or even to fund payroll. With our accounts receivable financing options, you can access cash without having to give up equity in your small business, it's also less restrictive and less expensive than equity financing. A/R financing can increase or decrease based on your current businesses size and needs, allows you to gain administrative support to manage your receivables without additional staff, and gives you access to cash when you request it (based on your eligible accounts receivable).
This type of asset-based financing allows small businesses to get instant access to working capital without jumping through the hoops or dealing with the lengthy waits associated with getting a bank loan. When a business leverages its accounts receivables to boost its cash flow, it also doesn't have to worry about repayment schedules, and instead of focusing on trying to collect bills, it can focus attention on other core aspects of its business.
What Are Similar Businesses Doing?
The first thing any business looking at accounts receivable needs to know is the standard for its industry. How are other like businesses handling it? Unless you have a good reason otherwise, your company should be behaving the same way as similar firms. To compare to the standard, a business needs to know its own accounts receivable performance. Some important measures include average receivables, average turnover, average number of days to collect, and receivable-to-sales ratio.
Check out what companies in your industry are reporting as their key figures, such as ratio of receivables-to-sales and average turnover of receivables. There are trade groups and commercial business data providers that can supply this information for you.
You can calculate average receivables by adding the receivables balance at the start of the year to the receivables balance at the end of the year, and then dividing by two. Calculate average turnover by dividing the dollar amount of sales made on credit for the year by the average dollar amount of receivables. Dividing the resulting number by 365 gives you the average number of days it takes to collect on receivables. The receivables-to-sales ratio is obtained by dividing total dollar sales by average receivables. Understanding and monitoring these averages will help you make decisions about your business's threshold and when to take action to improve it.
Improving the Invoicing Process
Once a business knows where it stands, it can look to improve by invoicing in an accurate and timely manner, and stating terms that are clear and definite. You can also consider the language you use in your billing. For instance, saying “Payable in 30 days" is preferable to “Due immediately."
Invoicing weekly, biweekly, or when a shipment goes out is better than simply invoicing once a month, and offering the ability to pay by credit card can help to improve cash flow significantly.
Improving customer quality can also help. Requiring credit applications for sales other than cash is a good move, and so is getting credit reports on new customers. But slow-paying customers should be considered candidates for cash-only sales in the future.
Want to quickly shift your cash flow? Try automating payments. With the permission of your customers, you can keep credit card or bank account information on file and then initiate payment just by generating an invoice.
If you’re not ready for the level of bookkeeping software that can handle these details for you, ask your clients and customers to fill out a credit card authorization form. That way, you can instantly process payments for outstanding invoices. You also establish an understanding with your clients early in your relationship about how and when payment is due.
It's true that you will incur fees with credit cards and automated clearing house (ACH) payments, but isn't Net 6 minutes with a credit card better than Net 60 days with a check?
Send Invoices Right Away Online
Customers pay significantly faster when you invoice them right after the work is done, and you make it easier for them to pay you. This is common sense. If you ever had to pay for something via check, you probably waited a few days until it was convenient for you to go to the post office. It may have also taken you a few days just to pull out your checkbook and find a stamp.
By contrast, paying online with a credit card is much less of a hassle. It takes seconds as opposed to minutes. The question is, how do you charge customers online if you’re not an online store using an e-commerce system?
The answer is simple: Online invoicing and accounting software enables you to easily create invoices for your clients, which you can then send through email with a link for them to pay via credit. All customers have to do is click “pay now,” and they’ll be taken to a secure payment processing gateway to enter their card information. These tools are available through most invoicing and accounting programs.
After You've Invoiced
Following up on unpaid invoices is just as fundamental. Mail reminders monthly and if invoices go unpaid longer than the industry standard, try following up with a phone call. Be firm, but polite and understanding. And don't forget to double-check your paperwork, since tardy payments are sometimes caused by invoicing errors on the seller's end.
Ideally, you don't want to find yourself in a cash crunch, so look for cash before you need it. If accounts receivables monitoring indicates money will not arrive before bills are due, arrange for a loan or line of credit in advance. Borrowing can take time and it is preferable to negotiate terms of a loan before the last minute.
But perhaps the best thing a business can do to keep accounts receivable healthy is to consistently provide high-quality products and services. Happy customers are more likely to pay on time.
Use Discounts as Rewards
If you find that your customers need additional incentive to speed payments along, consider an early or on-time payment discount. Many invoicing programs allow you to include information about such discounts directly into your invoices. By offering a reward for more desirable payment behavior, you might find that you not only improve cash flow but also cultivate a better client base. Such incentives reward you and the customer.
Each of the recommendations made here can help your small business allocate capital where you need it, in your bank account and ready to fuel your next business need. We're here to help! Call (855) 998-LVRG or click below to get started.