Paying Attention To Accounts Receivables Aging Can Avert A Cash Crisis
The main reason businesses fail is through the lack of working capital. When cash flow problems occur the knee jerk reaction of managers is to borrow more money to meet the financial commitments of the business until they can borrow no more, can not make the repayments due and eventually have to close the doors. Proper management of accounts receivable including a reliable account receivable aging process is essential for accurate cash flow planning. If income can be accurately forecast outgoings can be planned in such a manner as to avoid cash problems.
There are different ways to manage accounts receivable but whatever method is employed and whichever accounting software package is used, there are three vital steps in the proper management of accounts receivables. Keeping financial records up to date is the first step to maintaining control over accounts receivable. On a daily basis sales and sales receipts need to be recorded and matched against each other. The next essential step is to produce customer documentation - invoices and statements. It is the optimistic business manager who expects to receive payment without sending out a customer invoice followed by a statement. Finally, it is important that customer accounts are monitored and payment histories checked before further goods and services are supplied. Whilst accounts receivable represent an asset on the balance sheet of the business it's important that an accounts receivable aging process is followed in order that the true value of the debts is represented. Most accounting software packages provide an account receivable aging report, usually for a few mouse clicks, and such a report can provide a wealth of information. The accounts receivable aging method will vary from company to company but there are two basic ways of assessing the impact accounts receivable aging is having on the business. Some companies simply write down debts that are more than 90 days old on the basis they have become bad debts. Others choose to make an allowance for doubtful debts which is a liability account that matches against the current asset of the accounts receivable account. When making an allowance for doubtful debts some businesses choose to take a straight percentage of sales, others follow what is called the balance sheet method and analyse the accounts receivables deciding to make provision against those that are most unlikely to be paid. For accurate cash flow forecasting and financial reporting this latter method is probably the most reliably accurate. To keep a business safe from the risk of failing through lack of cash flow managers should have a clear and detailed credit policy in place that is applied to all customers. Such a policy should be clear about how the decision to advance credit is made, what criteria must be fulfilled, what the repayment terms will be and whether interest will be charged on overdue accounts. If the credit policy is clear to staff and to customers and applied universally a lot of cash flow problems can be avoided. It is essential that invoices are sent immediately. If invoicing is left until the end of the month it can extend the credit period to 60 days. The 30 day clock starts running on the date of the invoice and for that reason, the sooner the invoice is issued the sooner the funds can be collected. Having proper business processes in place makes decision making easy. A clear account receivable aging process coupled with an accurate and up to date account receivable aging report means it is easy for business owners and decision makers to respond to customer requests and to see in advance when cash problems might be expected. By taking a proactive stance regarding accounts receivable aging and having proper processes in place facing a cash crisis in business should be a thing of the past. |