Cash allows your business the opportunity to pay employees’ salaries, pay bills, buy additional inventory and even expand your business. Unfortunately, even some profitable companies may have a negative cash flow. This is because according to the commonly used accounting system, any service performed or good delivered counts as a revenue. The problem, however, is that you don’t need to actually physically receive the money for that product or service in order to be able to count it as revenue. Instead, you label the unpaid revenue as an accounts receivable and hope that your customer won’t take too long before paying you. Instead of hoping, however, you can properly manage your A/R accounts for better growth.
- Don’t be too lenient with your customers.
Allowing your consumers the ability to receive something on account can be great for business. Many companies want to stretch their cash as much as they can and may choose businesses that offer them the option to not pay right away. However, this does not mean you need to sacrifice the health of your business to satisfy others. Furthermore, if you provide excellent services or products, other businesses will be willing to pay sooner. Therefore, if you normally allow customers 60 days to pay you, you can decrease that time to 30 days and receive your money quicker. Another way you can get your customers to pay you on time is by charging a late fee or offering a discount to those who pay cash immediately.
- The amount of time you allow for your accounts receivable should be less than the amount of time you’re allowed for your accounts payable.
Let’s say you provided Company X a service that is worth $500, which they’ve decided to put on account. According to your A/R terms, they have 90 days to pay you. However, you also bought a product from Company Y also worth $500, and you have to pay them in 30 days. Unless you have a cash reserve in your business, you may face a serious problem in your ability to pay your accounts payable. Moreover, even if you do have enough cash, eventually that cash will run out if you keep operating under these terms. Therefore, it can be extremely crucial that you receive payments for A/R soon enough for you to be able to use that money to pay your A/P and other bills.
Managing your accounts receivable is very important to keep cash flowing into your business. You can achieve this by properly dealing with the terms of your A/R and getting your customers to pay you sooner.