Small Business Advice: Improve Your Accounts Receivable Collection Cycle Now

September 1, 2008

Small Business Advice: Improve Your Accounts Receivable Collection Cycle Now

Almost any small business can use advice on how to improve its collection cycle. The first line of defense against late payments is a complete invoice. Your bills should be accurate, detailed and easy to understand. If difficult to understand, then your client will need to call for additional information. That translates into “you have been added to their to-do list,” which increases the time of your collection cycle. Include on each invoice:

- Your company’s contact information: name, address, tax id number, phone and contact person
- The date the invoice was prepared
- The customer’s name and address
- A description of the goods or services sold to the customer - itemize, if possible (An itemized bill is harder to contest.)
- The amount due, with sales tax amount broken out
- When the invoice is due

Once prepared, send invoices promptly. Another piece of small business advice is the longer you take to bill a customer the less likely you are to receive payment for the goods and services provided.

Many of my business mentoring clients are surprised to learn that the step requiring the most amount of time in the cash conversion process is the time it takes to collect on a customer account. The cash conversion process begins the moment they make contact with the customer, and ends when they have received and deposited payment from that customer; hopefully this cycle repeats itself each month.

The time it takes my business mentoring clients to collect their accounts receivable is measured by the average accounts receivable collection period. The average accounts receivable collection period is an important indicator for determining when their business will be paid for the goods and services it provides.

This simple calculation gives you a powerful tracking tool that helps you adjust your cash in-flow on an as-needed basis:

Step 1: Calculate your average collection period by dividing your total sales for the previous year by 365. This gives you your average daily sales volume.
(Total sales / 365 Days = Average Daily sales Volume)

Step 2: Then divide your average daily sales volume into your current accounts receivable balance to get the number of days it takes to collect a bill.
(Average Accounts Receivable Collection Period = Average Daily sales Volume / Current Accounts Receivable Balance)

Now that you know your average accounts receivable collection period, you then need to interpret that number as it relates to your business by asking four important bookkeeping service questions.

Bookkeeping Service Question #1: Is your average accounts receivable collection period in line with the company’s credit policy? If your credit terms provide your customers with 30 days to pay their bills, then you should expect that your average collection period will be somewhere around 30 days - maybe a little longer. If your average collection period is 60 days then you need to examine other factors that affect billing.

Bookkeeping Service Question #2: Are you billing your customers consistently? Look at your Accounts Receivable Aging Report, the report that summarizes all of your outstanding invoices by client and number of days outstanding. Are the outstanding invoices on that report related to products and services sold within the last 45 days, or are they related to products and services you provided three months ago and just got around to billing? Create a procedure to bill customers once a week or each time you have a completed sale.

Bookkeeping Service Question #3: Are you billing your customers effectively? Are your customers calling you with questions about your invoice? Perhaps you didn’t have that important upfront conversation with your client about how you charge for your products and services. By having this conversation, confusion and anxiety over wondering if the customer is going to pay you can be eliminated.

Bookkeeping Service Question #4: Are you tracking overdue accounts and taking consistent action to collect past due accounts? Do you have an effective tool in place to track when an account comes due, and knowing who has paid their bills and who has not? When a customer’s invoice goes past its due date, is there a procedure in place to follow-up with that customer? Sometimes sending customer statements and making friendly reminder calls is all it takes.

By answering these four basic questions, implementing a few bookkeeping service procedures and heeding this small business advice, you’ll soon be running a fine-tuned collection machine.

Laurie O’Neil is the co-founder of The Bookkeeper’s Referral Network Inc., the place where business meets great bookkeepers. To get your copy of The 9 Disastrous Mistakes Most Freelance Bookkeeper’s Make in
Business (and How You Can Avoid Them!) visit http://www.bkpr-network.com

Tags : small business advice, bookkeeping service, business mentoring