How To Manage Your Company's Receivables
By Max Kleynburd
From the "You're the Boss" Section of The New York Times
One of the most important factors when you extend credit to customers is to actively manage your receivables. If you wait until the invoice is thirty days past due you may be as "guilty" as the customer that hasn't paid you.
Unfortunately, making sales and collecting payment aren't one and the same. And although your new billing on a monthly or quarterly basis might be strong and coherent, due care must be paid to your collection time frames and systems.
If you're running a sizeable business and have a bookkeeper, a controller, or a team member that handles accounting and billing, you may be one step ahead of the game. If you're running a smaller operation and wear many hats, it may be time to add one more hat to your collection. After all, active account receivables management and collections can be a full-time job.
Are your customers taking too long to pay their invoices? How do you know? Start by calculating your Average Collection Period by relying on this simple ratio:
Now that you know this key metric for your business, it's time to chisel away to reduce the time frame. Start by establishing a comprehensive and complete account receivable and collection policy. For instance, you may choose to bill your customers on the first of every month, with invoices due within thirty days.
Make this policy clear to your clients and emphasize it throughout the relationship -- when you sign the initial client contract and when you send out the invoice.
With that in place, be proactive when it comes to managing your collections. Don't wait for an invoice to become past due -- act swiftly because time is the enemy of collections.
A timely call, personal note or a statement of balance can do the trick. More importantly, customers who are delinquent on their payments often rely on the philosophy of "out of sight, out of mind". If you show yourself as a respectful, yet diligent vendor, you're likely to get paid first.
Finally, put in place an iron-clad system to track your receivables and A/R aging time frames. QuickBooks does an excellent job of handling these functions and will provide you with all the necessary tools to stay in control.
Don't let chasing your receivables get in the way of your company's success -- get in the driver's seat of your collections.