It is undoubtedly a fact that a business needs cash to continue its operation. Your customers’ non-payment of debts due to refusal, delay or forgetfulness, may lead you into financial difficulties of your own!
Collection of debt is one of the important elements of cash flow management that is often underachieved by businesses. In contrary, it may not be that tough. If you employ competent individuals and enforce an effective set of rules, debt collection procedures are simple. Moreover, this could positively improve your cash flow.
Hiring the right employee
It cannot be denied that the term ‘debt collector’ already has a negative implication to us. It somewhat implies annoyance or fear. In addition, because the collection of cash is under accounting or finance, many business owners think that bookkeepers are the specialists in chasing customers to pay – this should not always be the case.
The responsibility of collecting money due from customers (also known as accounts receivable) should be with someone who is good with people, someone who is confident and responsive. They should be systematic, time-conscious, and knowledgeable on customers’ payment patterns, habits, and their ability to pay.
“Regularly check your accounts receivable to keep cash flowing in.”
Having a report that shows outstanding debts which have aged 30, 60, or 90 days would not actually determine the average accounts receivable days (the number of days it takes before the customers actually pay their debts).
Knowing your average accounts receivable days gives you a helpful hint in measuring your debt collection’s effectiveness. This can be calculated using this formula:
Accounts Receivable / Revenue x Time = Average Accounts Receivable Days
For instance, a business reported revenue of $120,000 in the first quarter of the year. The outstanding accounts receivable for that period totaled $90,000. The days in accounts receivable is as follows:
$90,000 / $120,000 x 90 days = 68 days
By using this formula, you will be able to check regularly and determine whether your debt collection is improving or not. This is essential to both the accounts receivable collector and business owner.
Hire the most competent employee for the job or outsource this function to a professional with a good track record of results. Both of you should work on the rules for debt collection and use it in assessing performance.
Set dates in your calendar on when to evaluate outstanding accounts receivable so that you will not forget about it.
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James HuyVuong is a CPA and the owner of Your Accounting Partners. Partnering with businesses from start to scale thru to sale.