Accounts Receivables constitutes a significant source of funds which is the key to any successful business. Any business, irrespective of its mode of operation and size, depends mostly on accounts receivablesto ensure a smooth cash flow system.
There are multiple ways to manage accounts receivable. None of them can ensure complete success but can curb the uncertainty of recovery. In the scenario of B2B sales, offering a discount for quick payment, has often proved to be beneficial. The discount usually varies between 1% to 2% of the invoice amount when paid within a stipulated time frame, as per the terms & conditions agreed upon by seller and buyer. This benefits both the seller and customer. It’s a win-win situation for both. You get a hold of your cash rapidly while the buyer enjoys a little savings
The 2nd best option is to levy financial charges as a penalty on overdue accounts. This usually varies between 1.5% to 2% per month. This acts as a catalyst and forces the customer to make timely payments, simultaneously compensating the business owner for the length of time the cash is unavailable.
It’s universal that, longer the receivable are outstanding, there’s a reduced possibility that the payment will be received. Therefore, it’s of vital significance to notify customers who are overdue, send past due notices and employ a policy for when to turn a customer over to collections or file suit in court. Collections have better luck if the bill is 90 days old or younger. Diligence and quick action at your end, is what distinguishes between getting paid or not.
The fault lies in resuming work for a customer who is yet to pay. Ask yourself this,if they have denied you timely payment once, why would they be prompt now? We all know the squeaky wheel gets the grease, you aren’t squeaking if you continue to do work for a deadbeat customer. For a Business to run efficiently, the account receivable process has to be continuously greased to ensure effortless functioning. Depending on the amount of cash available one has to buy more inventory, pay salaries, and cover the overheads, etc. accordingly. If a chunk of the business cash is clogged in accounts receivable, the business owner is headed for big trouble.
To ease up the trauma of accounts receivable management, most businesses acquire a line of credit from banks. This plays the role of a credit card for the business and preserves the cash flow system in order to survive until the accounts receivable are recovered. The charges for the same varies from bank to bank. The drawback being this is equivalent toa loan, which needs to be paid back or the bank will foreclose on the assets it demanded as collateral.
The last resort is to factor (sell) the accounts receivable. In this scenario the business owner trades a portion of the outstanding receivables to a factoring company. The factor remits a check to the business owner. The accounts receivable payments then go to the factor. The fee for this service varies depending on the quality of the customers owing the accounts receivable. A business that doesn’t qualifies for a line of credit, this may be the only way to keep the cash flow at a stable rate.
For some businesses, factoring seems to be a sensible option to go for despite of being qualified for a line of credit. The best part about factoring is, it’s not a loan. Factoring fees have come down, making it a very reasonable choice for businesses. The factoring companies sometimes help manage the accounts receivable for you, thus saving your time and wages.