Small Business Account Receivables - Do Some Receivables Analysis To Determine The Health Of Your BusinessFor a small business, account receivables and the way they are managed can mean the difference between survival and bankruptcy. Account receivables is a figure sitting on the balance sheet of most small businesses. It is a current asset that has value to the business - it represents money owed to the business.
What many small businesses fail to do is conduct a full receivables analysis on a regular basis in order to measure their performance. Account receivables can tell the owner of a small business a lot about the way the business is being run. Receivables Analysis By calculating the average collection period it is possible to plan and forecast the cash situation for the company. It is possible to anticipate problems before they arise in order that contingency plans may be put into place. Far better to know a problem is likely than to have one arrive at the doorstep unannounced. The average collection period can be calculated in a two stage process. 1. Calculate a figure for average daily sales by dividing annual sales by 360. 2. Divide the accounts receivable balance by the average daily sales figure to reach the number of days that represents the average collection period figure. Having conducted receivables analysis to ascertain the average collection period of accounts receivables, the information needs to be used. If the agreed credit terms of the small business are 30 days and the average collection period is 42 days there is a problem. Questions need to be asked about why it is taking so long to collect what is owed. In addition cash flow forecasts, that will have been constructed on the basis of a 30 day credit period, need to be amended to reflect the reality of the situation as this can seriously impact the real cash situation of the company. A similar calculation performed with monthly figures, done every month as part of the management accounts, can give early indications of any imminent cash crisis. Basically by tapping into the information hidden in the accounts receivable figure, by conducting receivables analysis, the true health of a business can be revealed.As well as providing useful metrics for a small business accounts receivables can also be leveraged to improve the cash flow situation within the company. There are a number of options open to the small business owner which include factoring and securitisation. The assistance of a reputable company, such as West Asset Management, can help small business owners extract the most value from the financial receivables that appear on the balance sheet of their companyIt is essential that small businesses act in a professional manner regarding their accounting policies. Not only will this improve their chances of being paid on time but it will also make it easier to persuade finance companies to offer assistance should that become necessary. If a cash crisis is reached and help sought, the process will be delayed if financial records have not been properly maintained. Financial receivables may just appear to be a figure on a balance sheet - but in fact that figure offers a snapshot of the health of the business. |