In this blog I’m going to discuss a major challenge for many businesses – the whole issue of receivables and payables. Many businesses operate on a pay-as-you-play basis where they are paid immediately for products and services that they supply. Most retail outlets fall into this category. For them, billing and carrying receivables from their customers is not an issue. Not every business is that lucky.
Similarly, some businesses have a continually healthy cash flow and can pay their bills pretty much as soon as they come in the door. The rest have to be more careful and strategic about it. For those who have immediate or long term cash flow issues, you might want to refer to my blog from last month to check if there is anything in there that can help you.
For many businesses, the process starts with supplying the product and/or service. Then an invoice is created – effectively setting up the receivable. The invoice is sent to the customer and now the waiting game begins. Managing receivables and ensuring the inflow of money on a continual and timely basis can be very frustrating for many business owners and managers. It’s not always the delay on the part of the customer as they may have their own cash flow issues and are also doing their very best.
Regardless, the business needs the money to pay for product, etc. and to pay staff and any government taxes owing. The painful part can be the wait, or even worse, having to aggressively go after customers for money owed. Not too many people enjoy doing this particular task.
There are usually payment terms in place but there are also customers that regard these terms as guidelines only – or ignore them altogether. At worst, their cash flow issues are forcing them to decide who gets paid and in what order. The challenge is to make sure you keep your position on that priority list. For what it’s worth, when they ignore you, it may mean not being allowed to do business with you in the future or facing prepayment or COD requirements. Small consolation as you wait for your money. Hopefully these customers are very, very few and far between.
Aging your receivables is definitely worth your while. Statistically, the older the receivable, the greater the chance of a full default by the customer. Putting extra pressure on these delinquent accounts just may save the day. If that fails, you are forced to bad debt the invoice so that you can at least claw back the taxes you have no doubt already paid. Regardless, your customer has just received free product or service. You can send the invoice to collections or take the customer to small claims court but this too is difficult, potentially costly even if only with regards to your time, and often unsuccessful. What has to be weighed here is the value of what you are going after.
Let’s move over to the flip side – your payables. Keeping in mind what has already been discussed, now you are the one needing to pay your bills. Aging payables is a normal part of business in a lot of cases and if managed properly can help your own cash flow. Many suppliers are happy to extend payment terms in order to get your business. Often, you need only ask.
When managing your payables, it’s certainly important to track each bill as it comes in and set up a system to pay it on time. This can be as simple as an accordion file separated by day where you pick each day’s due bills and cut the cheques or send the e-transfers. Others set aside a specific time each week or some other time frame and pay all the bills due at that time. Regardless, having a system in place should ensure that nothing falls between the cracks. The penalty could be losing a valued or necessary supplier or facing your own prepayment or COD demands from them.
Here at Fiscal Performance we stand ready to assist our clients with their invoicing, receiving of money into the books, and bill payment challenges. An important part of this is the generation of reports that will help to track the aging of receivables and payables. I’m always available to discuss how we can be of service in this regard. You know the drill – just connect.