Want more cash? Manage your accounts receivables
Jan. 26, 2011 at 4:01 p.m.
Updated Jan. 25, 2011 at 7:26 p.m.
BY STEPHEN KILGORE
Do you have profit for the year but no cash?
If the answer is yes, the solution to this problem could be something as simple as managing your business accounts receivables better.
Accounts receivables accumulate when the business owner offers products or services without receiving payments.
Here is an example to better explain how a business could have a healthy profit for the year, but no cash.
Businesses have a limited amount of cash in their bank account. Business owners want to help out and keep their customers as happy as possible. To keep customers happy, sometimes business owners will extend their customers products or services on credit (accounts receivable).
This is perfectly fine to do, as long as the business owner has the surplus of cash to extend credit and the customer pays the money back in a timely manner, usually fewer than 30 days. If this is not true, then you likely are low on cash and have an accounts receivable problem, which is not likely going to fix itself.
The first thing to do to get better control of accounts receivables is to look at a list of customers who owe the business. This report is called an aging accounts receivable report and shows who owes money, who is past due and by how many days.
The customers to look for are the ones who have outstanding balances of more than 30 days. Assess these customers and possibly temporarily terminate credit until the customer is current again.
It's good to have a policy in place for the extension of credit. This way, you're consistent with the extension of credit to all customers. Like all policies, the credit policy would also need to be reviewed periodically.
When I have recommended business owners temporarily terminate the extension of credit to customers who are past due, they almost always cringe. They say, "But I won't have any sales and may lose my customer."
If this is true, the business owner has to decide who they are willing to lend to, if it's profitable and worth the risk to lend to customers who pay slowly or who may never pay.
Usually, there is not much of a decision to make: Either you cut off the customer's line of credit, or sooner or later your luck will run out and there will not be any more cash with which to extend credit.
A good alternative is to accept credit cards. This way, you no longer accept the risk of the credit, and you are paid in a few days.
Gaining better control over your accounts receivables could be one way to improve the cash position in your business.
There also could be other reasons for your low cash. Every industry - retail, service, wholesale, manufacturing, etc. - have different industry norms for accounts receivables. Regardless of the industry, your sales price needs to reflect the cost of extending credit to your customer. Otherwise, you will likely never pay yourself, which is the goal of owning your own business.
If you are having troubles with cash for your business, don't hesitate to ask us for help.
Stephen Kilgore is a senior business adviser for the University of Houston-Victoria.