If you allow your account receivables to outrun your growth, it could lead to the demise of your business. I will show you the facts of allowing that to happen and how you can overcome that. But before we continue with this video, allow me to define what an account receivable is. An account receivable is simply:
Account Receivables = When your client owes you money.
If your clients owe you money, that’s called an ‘Account Receivable’. So why it is so important to manage your account receivables properly? Firstly, it provides cash flow for the business, and did you know that one of the main reason why businesses fold is because of the mismanagement of its cash flow; and even profitable businesses go into bankruptcy because of mismanagement of their cash flow.
‘Cash Flow Management’ is a big term that is thrown about loosely in the business world. While Business owners understand the importance of it, they don’t do all that they can in order to maximise cash flowing into to the business. Allow me to share with you a few things that would happen if you don’t manage your cash flow or in this case, manage your account receivables properly.
- Impacts on Cashflow
Not managing your account receivable will impact on your cash flow of the business. You have more and more business, more and more people buying and utilising your services but less and less of them proportionally pay you in cash or pay you on time. Your account will start to dry up as you continue to work in and on the business. Your cash flow and the amount of cash you can work in the business dries up.
- It Adds Stress
If you have less cash even though you are profitable, making day to day decision becomes more stressful.
- Increased Management Resources
You need to spend more time in resources just managing those people who don’t pay you on time. You need to follow up with phone calls, you need to put processes in place to follow up with them, encourage them to pay, or even demand payment. These entails resources and therefore impacts on your company as well. Most importantly, if you allow your accounts receivable to outgrow your growth and it grows into a sizeable amount, suddenly, that amount doesn’t become your client’s problem for them to pay you. It becomes your problem for you to take it out your clients.
- It becomes your problem, not your client’s.
If your clients owe you a $1,000 or $2,000 it’s their problem. You can chase them for it, you can work with them to pay you. But if your clients owe you $50,000, or owe you a $100,000 or $2 million dollars. It suddenly becomes your problem, not theirs. You will have to pull in the money in order to survive, you will have to pull in the money in order to fund the next operation of the business, and that’s the main psychological point. It is now your problem. It is not their problem and that’s the disadvantage of allowing your accounts receivable outgrow your business growth.
What I am about to share with you are some of the strategies that businesses whom I have seen and I’ve worked with, implement in their businesses in order to manage their account receivables.
- Offer incentives to encourage the desired behaviour.
Offer incentives to your customers who paid the bills rapidly and on time, you reward the people who pay on time. I have encountered businesses who actually offer a 5% discount if they were to pay on time. There has brought some of the businesses who do not pay on time to pay on time because they get that percentage discount.
- Ask for a Deposit
Ask customers to make a deposit on the services they provide. You can always ask for a 20%, 30% or even 50% deposit depending on the type of the business or services that you have.
- Perform Credit Checks
Do credit checks for all non-cash customers. Customers who don’t pay you cash and wants to pay you on credit, do a background check on them, ask their past payment suppliers to see whether they pay on time, get an idea of the behaviour habit of this customer before you offer them credit.
- Issue invoices and follow up promptly.
Issue invoices properly and follow-up immediately when payments are slow. By doing so you are informing your customer that you are ‘On the ball’, you are a ‘switched on’ business. You know what is going on and you are always following up with them and they cannot get away with it by not paying you on time.
- Track Account Receivables
The next one, track accounts receivable. Identify and avoid slow paying customers and when they come back to you again, ask a poor paying customer to pay up in cash.
- Ask for cash upfront if possible.
If a customer has a history of paying you poorly, you can always ask them to pay the next one in cash. You can ask a deposit for the next service and from that day will help you in your cash flow.
- Use Technology to track account receivables.
Use technology to track all these accounts receivable, you can automate the tracking process as much as possible this will save you time and will save you energy; and you just need to follow up the execution rather than the pulling out a big book and seeing who owes you by when. If you can automate it they would help you in your processing much faster.
- Get clients to pay in advance.
Lastly, make your customers pay in advance. Before you provide your services, make them pay you in advance if possible. This may seem impossible to most businesses but, if you think outside the box, it can be done. I have seen businesses actually start from a credit system where the clients come in and utilise the services and pay 30 days later, to migrating to a deposit required, and then payment at the end of the service to the point of actually getting the customers to pay upfront. It can be done. You just have think ‘outside the box’. This does not apply to every business situation but if you are willing to think outside the box, it is something worth exploring in certain circumstances.
Not all the strategies I have mentioned above may fit your business and there’s no one shot of a particular strategy working for your entire business in working for your business as a whole. If you implement various portions of the strategies I have mentioned above, you could start to see an improvement in the reduction of your accounts receivables which then allows managing your cash flows better. So please take all this into account. If possible, seek your accountant’s advice as well as the best way to move forward with this. If not, seek your business advisers thoughts and opinions about it and from there you can start to implement it accordingly.
Thank you very much for watching this video and I hope that it helps you.
I’ve authored a book titled ‘$20k to 2 million in 2 years‘ which talks about the challenges of businesses would face when they go through exponential growth. You can click on the link get a free preview of the book or you can go to the website to explore the other business resources that are available for your benefit.