With the economy not doing well and bank liquidity at question, now is the time to conserve cash. If your sales should slump further, you need to make sure you have adequate cash. Without cash, businesses fail, it is that simple.
Cash is king in this environment and must be managed now better than ever for your firm’s survivability. There are many methods to manage cash and you have to choose the ones that are right for your company. By far, the management of accounts receivable is the one area that most firms have to work on.
Accounts receivable are like loans which you give to your customers without any interest being earned. Two great ways to monitor your accounts receivable are an average collection period and an aging schedule of accounts receivables.
An average collection period is computed by dividing accounts receivable by your sales per day. For example, if your receivables are $400,000 and your sales per day for the month or year is $10,000, then your average collection period is 40 days. If you are selling on 30 day terms, then you know you have to do some work on collecting all accounts past 30 days as 50 percent of your accounts receivable are older than 40 days, which is not good at all.
Now an aging schedule works in conjunction with the average collection period by showing which accounts are overdue with both their balance and the age of the receivable. Any accounts over 30 days should be gone after as this represents your funds that your customers are using with zero interest.
Once you know who owes you money, then you need to attempt to collect it. While writing letters and calls by staff are okay, one owner of a business calling another one is the most effective means to collect funds. Additionally, asking for money is not what your staff really likes to do and by taking the leadership on this, you are showing your staff that you are willing to step into the trenches.
Obviously, every firm needs to have a collection policy so that the steps you need to go through to collect these funds are automatic. Too often staffs are hesitant to call up and ask for money so that whatever collection policy you have, you need to monitor this with an average collection period and a receivable aging schedule to insure that staffs are following through.
The longer you wait to try to collect in today’s environment increases the probability that the firm will go under because not paying bills is the first sign of major financial problems.
You avoid so many of these problems by not letting the management of your accounts receivable slip. While some customers might not be able to pay their whole bill, you must get them to pay something, then put them on a COD basis to insure that their receivable does not go up.
Now make sure that you are very carefully monitoring your accounts receivable and have policies in place to do this with both an average collection period and an aging schedules. Additionally, you must have a very rigorously followed account receivable collection policy.
Jerry Osteryoung, is the director of Outreach of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University, the Jim Moran Professor of Entrepreneurship; and Professor of Finance. He was the founding Executive Director of the Jim Moran Institute and served in that position from 1995 through 2008. He can be reached by e-mail at email@example.com or by phone at 850-644-3372. All of Dr. Osteryoung’s articles can be found in a searchable form at www.cob.fsu.edu/jmi.