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Manage Receivables For Better Profitability

Feb 26, 2008
If you want to be successful in business, your customers have to pay you on time. If you're like most businesses, you sell products on a credit basis, and then ask your customer to pay you later, such as within 30 days. During this time, you essentially lend money to the customer, and expect that you are going to be paid back. Only when the invoice is paid do you have the money you need to successfully run your business.

Unfortunately, it's not always that easy to get paid. Almost every business has a customer or two who don't pay or who are slow paying. If you're not proactive and don't manage these receivables, you can quickly run out of cash. Here are some ways you can ensure customers will pay you on time.

1. Ensure that customers deserve credit. If necessary, perform credit checks and require that applications for credit be completed before you accept orders. If the purchase amount is particularly large, you can ask for and review the customer's financial statements. Set limits for credit and then make sure they're stuck to.

2. Run aging reports and take a look at them regularly. Aging reports will help you know what the makeup of your accounts receivable is, and show which invoices are less than 30 days old, then those that are 30 to 60 days old, 60 to 90 days old, and later. Make sure you know how you should interpret these reports so that you can spot problems early. Have someone specifically on staff to follow up with late payers. As invoices get older, they become much more difficult to collect on.

3. Send out invoices immediately. The sooner invoices go out, the sooner payments can come in. Your bills should also be detailed, clear and accurate. The more detail you include, the less likely it is that a customer can dispute charges.

4. Use rewards and penalties. Consider including an incentive for prompt payment, such as offering payment terms that provide a 2% discount for payment within 10 days. Your pricing schedule could also include a penalty fee for late payments. Be sure to stay within the limits set by law.

5. Pace your growth. A significant increase in sales can have a huge impact on your company's receivables and cash needs. Tap into the advice of a seasoned financial professional to develop a strategy for growth; options to consider might include additional financing, a line of credit at the bank, or price adjustments. You may need to sacrifice some growth to ensure you don't outpace your ability to pay your bills.

Successful companies continually seek new ways to improve their accounts receivable function because they know that improving the process can lead to significant financial gain. Fewer outstanding account balances mean fewer bad-debt write-offs and enhanced profitability. And a well-managed portfolio of receivables can boost cash flow and expand working capital.
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Author: Margot Brandlin lives and works in
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