In our last adventure, we delved deep into the world of inventory aging.
Now, let’s turn the spotlight on another cash hog in your business:
And do read on, because as a reminder, this isn’t just about numbers on a spreadsheet; it’s about the pulse of your cash flow.
Understanding the Thievery of Accounts Receivable
Accounts receivable, in simple terms, is the money your customers owe you.
Another way to put it – that may surprise you – is that your Accounts Receivable represents money that you are actually lending to your customers.
Yup – you’re a bank.
And you don’t get the advantage of being “too big to fail” like some real banks.
You might think, “I’m owed $900,000; that’s a gold mine! We’ve made a ton of money. Look at all those sales.”
But – if customers are paying you that money over a long period of time (or worse, they decide to not pay it at all) then those sales dissolve like salt in water.
It’s like they never happened.
And the longer someone owes you money, the older that Accounts Receivable gets — we call that the aging of Accounts Receivable.
If you go to borrow money from a bank because you need cash sooner than your customers pay you, they are going to be very interested in the aging of your Accounts Receivable.
See, they know that all Receivables are not good Receivables.
Before they lend you money – they will want to know how old that Accounts Receivable is.
They know that some of it may never be collected.
So, although you may see it as money in your pocket, just like how you can’t spend it until it’s actually in your pocket, banks don’t count on it as money in your pocket either.
As I’m pithy enough to say to my clients on the regular: Your cash isn’t your cash until you can see the green. And the older your Accounts Receivable is the less green it is.
Because old debts are like stale bread – they just don’t have the same value.
You (and any bank) should only trust that a fraction of your Accounts Receivable will turn into cash. And the older the debt from your customer is, the smaller and smaller that fraction is.
For example: let’s assume that one customer owes you $1,000 and has only owed you that money for five days; on top of that, it’s not even due from them until the end of the month, and they always pay their bills on time. Well, that cash is getting pretty green, and I’ll let a client plan to spend it 30 days from now.
Now assume you have another customer who owes you $1,000; but he has owed you that money for 3 months; on top of that, they’re a new customer with no payment history yet. I can pretty much tell you that $1,000 is worth no more than the piece of paper that your report is printed on. And a bank would tell you the same thing.
So if you are in a cash crunch, and your customers owe you money – remember – you are not in business to be a bank.
Give them every chance to pay you on time with this checklist every time you invoice a customer or set them up on a payment plan:
- Make sure they get the invoice (even better, get their credit card info or bank info to make automatic payment when it is due)
- 5 days before the invoice is due to be paid to you (or the payment is due) reach out and remind them that they should be processing the payment about now and confirm they have everything they need to do that and pay it on time
- 2 days after it was due, if you haven’t received the money (this happens a lot depending on how you take payments), reach out and confirm with them that the payment’s been made and get details (check number, or electronic transmission confirmation, etc)
- If they haven’t made payment, get a firm commitment from them about when they’ll be paying you
- Set up a process to follow up every 5-10 days until the bill is paid
In other words, don’t invoice your customer or put them on a payment plan and think that the job is over.
It’s only just begun.
Collecting that money is a whole new process that needs just as much attention as your invoicing.
The Art of Aging Elegantly
If you’re in the position that many of us have been in at one time or another, you may have some Accounts Receivable or late payments on payment plans that have built up on you.
I want you to think of every dollar of that as money that should, by all rights, be in your pocket!
And here’s where you, as a financial artist, step in.
Managing the aging of your accounts receivable isn’t just about sending reminders and invoices; it’s about ensuring every note hits at the right time.
- Chase those Debts: Don’t let customers dwell in the land of unpaid bills. There’s hidden treasure in those accounts, waiting to be uncovered.
- Age Matters: Just like with inventory, the age of your accounts receivable can make or break deals. Banks and potential buyers aren’t just looking at numbers; they’re reading the story behind them. Keep your business narrative sparkling by managing these aspects diligently.
- The Fine Print: Aging might not be the star of the show, but it’s a crucial character in your financial story. It’s the fine print that can make a significant impact on your ability to secure loans or attract buyers.
Crafting a Masterpiece
Armed with this knowledge, you’re not just navigating the business world; you’re crafting a financial masterpiece.
Your savvy in these areas of cash management demonstrates to anyone interested in your business (as a lender, a vendor, an employee, a buyer, or a customer) that you’re not just another entrepreneur – you’re a business owner with a deep understanding of your finances.
And that garners respect – and I can tell you from experience that when it comes to collecting money that is owed to you, the squeaky wheel does get the grease.
That doesn’t mean you’ll collect every old debt.
But you won’t collect them for sure if you don’t ask. Persistently and consistently ask.
And when and if you determine that it is money you’ll never see – get it out of your Accounts Receivable.
We call that “writing it off”.
Get it out of there because it’s not really an asset to you anymore; it has evaporated.
Leaving it there on your report as if you expect to collect it does not impress – in fact, it does the opposite. It gives the impression that your finger is not on the pulse of your business cash flow.
Because, well, I kind of hate to say it – but it isn’t!
The Bottom Line
Your journey in mastering the art of finance is just getting exciting. From reading these two last posts, you understand cash flow better than more than 95% of all business owners. Big and small business owners.
With your newfound understanding of inventory and accounts receivable aging, you’re poised to stand out from entrepreneurs that don’t own and manage this critical aspect of their businesses.
Remember, in the world of business, knowledge isn’t just power – it’s profit. And you have the knowledge now.
You have the rare key (the one that’s available only to the financially savvy) to unlock potential opportunities you never knew existed.
So, stay curious, stay vigilant, and let your newfound insights guide you to greater heights and stronger cash flow.
Your business story is still being written, and with each page, you’re becoming not just a better entrepreneur but a visionary … in the world of finance, no less!