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Accounts Receivable

Accounts receivable is any money your customers owe you for products or services they purchased from you in the past.

If you are in the business to sell your product or service to other businesses, cash sales are infrequent. You can collect on delivery (C.O.D.), but most commonly you will send your invoice to the customer or you will include your invoice with delivery of your product or service, and you will wait for your cheque or some other form of payment. This money is typically collected after a few weeks (most businesses require invoices to be paid in about 30 days), and is recorded as an asset on your company's balance sheet.

Your goal is to collect all the money owing to you, because if you don't collect, you've not only lost your profit, you're in same time stuck with the cost of producing your product or providing your service.

Manage your receivables well, because they represent a cost. Establish a workable and realistic credit policy, check out your potential customers, monitor your receivables carefully and take action if payment fails to arrive.

Accounts Receivable Process Improvement Tips:

Require credit approval prior to shipment and have clear and concise policies around recovering debt and issuing credit. Make sure your credit approval process is regularly reviewed to adapt to changing market conditions.
Check your potential customers with credit reporting agencies and bank. You have to pay for report, but this cost can help prevent bad debt losses.
Require the signed approval of the person in charge or credit department on all sales orders over a certain dollar amount. Tighten credit terms, so that financially weaker customers must pay in cash.
Your shipping memo and/or your invoice are usually only formal evidence of credit you'll have, make sure they are signed by the buyer.
Offer positive incentives (a small discount 3 to 5 %) to businesses that pay early. That way you can incentivise your customers to pay faster.
Simply remind your customers that payment is due.
Stay in contact with your customers. There may be legitimate reasons for late payment. Try working together with customers to find a solution. That way you can avoid late payments from becoming a recurring problem.
Charging interest and/or late payment fee on late payments can be an effective way to let your customers know that you're serious about minimizing late payments. Think carefully before imposing negative incentives, as it could lead to strained relations with your customers.
For large order, ask for a purchase order before you begin work.
If an order is particularly large, you might ask for a portion of payment before you start the work or ask to be paid in installments.
Stay on top of receivables and don't ignore collections. The fact is the older the receivable, the less likely you'll ever collect it.
Develop a proper collections procedure, maintain good customer relationships and always treat people with respect.

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Cash Flow Forecast

It is very important to calculate your cash flow. Take time to anticipate when cash will be short, because sales and revenues of business are rarely constant. Some businesses are seasonal, others extend credit to customers etc. Cash flow planning help you to have enough cash to cover all your... Learn more...



Establish credit policy
Tighten credit terms
Check out potential customers
Before issuing credit
Manage your receivables
Don't ignore collections - CALL

Did You Know?

Ratio analysis may help you put things in proper business perspective. Financial ratios quantify many aspects of a business and are categorized according to the financial aspect of the business which the ratio measures. They are an integral part of the financial statement analysis.

Quick Ratio or Acid Test Ratio, measures how quickly your company can raise cash by selling off its most liquid assets to meet its liabilities. To calculate, subtract inventories from current assets (cash, accounts receivable or any other quick assets) and divide by current liabilities.

Age of Receivables Ratio shows the efficiency of business's collection capatibilities. For example if firm's payment terms are 30 days, and ratio is 55, that long period may show a business's credit policies and collection procedures need attention. However, ratio must be compared with previous years and... Find out more...