Accounts Receivable Management - The Importance of Analyzing

When reviewing financials, most business owners focus on revenues, expenses, and net income. While analyzing revenues and profits is definitely a good way to get a snapshot on the health of your business, the accounts receivables can speak volumes.

In the simplest terms, accounts receivables measure the money that customers owe you for goods or services you already provided. It is an asset that is captured on the Balance Sheet. However, do you expect to collect 100% of your accounts receivable? Have you considered the possibility of having to write off uncollectible amounts if your customer defaults on their payments? Most businesses do expect to have a portion of their accounts receivable uncollectible and therefore establish an allowance for bad debts. However just because you anticipate you may have to write off uncollectible amounts, does not mean you shouldn’t be focused on collection efforts.

Let’s start from the beginning - how to determine the credit worthiness of a new customer. This requires you to do your homework. You should require every potential customer to complete a credit application and then review it and perform due diligence. Contact their past creditors, run a credit check, check their DnB rating, Google them. Collect meaningful data that will help you determine how much, if any, credit you should extend.

Perhaps your research does not paint a favorable picture but you still want them as a customer. In that case, I would highly recommend you require them to pay a deposit before work begins. As you work on their account you can apply actual costs incurred against their deposit. You can continue to do this monthly until they have established a reliable credit history.

If you choose not to require a deposit, managing your outstanding receivables requires effort on your part. Just because you made the sale doesn’t necessarily mean you’ll receive the cash! I once worked at an international company with annual sales over $100mill. Sounds fantastic right - not so fast….their receivables were the worst I had ever seen with many accounts uncollected for over a year. The impact on their cash flow was tremendous. We had daily cash calls to determine how to meet payroll and the bills were really piling up. It was literally like a snowball rolling down a hill out of control causing mass lay offs. Such a horrible outcome that could have easily been prevented. This is a perfect example of focusing on the sale but not the accounts receivable.

As a business owner you must review your accounts receivable - look at your Aging report on a monthly basis. If you do not have the time, consider outsourcing your Accounts Receivable Management. Our team has years of experience managing accounts receivable to ensure your cash flow is not negatively impacted. It requires a dedicated effort that will be well worth it!

The Bottom Line - there are many ways to analyze and manage your accounts receivable. Understanding your customers payment habits and following up on past due accounts are critical components.