Many businesses have a nice sized A/R but little money to show for it. Conversely the company’s accounts payable staff is always taking collection calls. If this situation is routine, the business may be behind the money curve. How does this happen and how can a business owner or accounting manager get ahead of the curve?
One reason may be that a small to medium sized company has a few large customers that may be able to name their own credit terms or just pay slowly. The key ratio that every business owner or accounting manger should be aware of is called the day’s sales outstanding or DSO. This important ratio calculates how long it takes a company to turn an invoice into cash. An accounting manager can calculate this number, or a small business owner can learn to so this for himself here:
The main idea is to turn accounts receivable into cash as fast as possible, and the larger the DSO number, the longer it takes for an invoice to be paid. All business have creditors and suppliers, and the problem occurs when a business pays out faster than the finance department can collect the receivable, in consumer terms, you’re upside down. How can a business speed up the process?
1) Motivate the collection staff-If an owner or executive level manager really wants to know where the problems are within a business, take a trip to the credit/collection department. Good credit people will usually have a solution as well. I know it’s not in vogue in these economic times, but offering a bonus for cash collected is not a bad idea.
2) Offer a cash discount-This is giving some of the profit away but it motivates some slower paying customers to pay on time, it may be worth the 1 or 2 percent discount.
3) Factor your invoices-Selling invoices to a factor also takes away profit, but the business is paid over night. Factors are great financial advisors since they are in “the money game” everyday.
4) Transfer some of the risk to someone else-This strategy is probably for a medium business. Some business set up a dealership network to service certain accounts. They sell product to a middle main who then deals with the slow paying account. The middle man then charges a premium for the product or service because he knows he’s going to wait to be paid.
5) Try to get some of money up front as a down payment (medium to large companies will resist this strategy so be prepared)
6) Take credit card payments-this is another strategy to get paid in a very short time, just make sure to read the agreement very carefully as some can be very expensive.