Managing receivables may seem like a simple task, but it is a part of the business plan that many entrepreneurs overlook. When mismanaged, it can cause major problems in business profits and can ultimately drive them to the ground. When looked at along side positive cash flow, receivables become significantly more complicated. Understanding this complex relationship can ultimately ensure greater profits and significantly faster business growth. Here are a few things to get you started.
Understand the Difference Between Cash Flow and Receivables
On the surface, a substantial number of accounts receivable can seem to indicate on-going business success. However, the number of transactions recorded in the books is not necessarily a positive sign that you are experiencing significant cash flow. Ultimately, open invoices do not replace or function as dollar bills. While they may indicate that the popularity of your business, they do not always equal profit. In reality, you need available funds to pay for bills. Too many open invoices can leave you looking for money for your expenses.
Fully Utilize Your Accountant
Many businesses do not use their accountants for tasks beyond bookkeeping. With years of education and experience in the field, accountants have gained significant knowledge regarding the complexities of a range of financial topics, including managing receivables. Therefore, they can help you accurately understand your invoices and cash flow and can ensure that you are truly profiting from your sales. Accountants are experts in the field and not simply glorified bookkeepers, so use them. Additionally, you want to make sure that you take the time to look through the books with them and work on understanding where your business is.
Keep Your Accounts Receivable Days to a Minimum
While you should attempt to limit the amount of credit you give, there are some businesses that cannot avoid it. However, if you have to take credit instead of cash, you want to make sure that your accounts payable days exceed the number of account receivable days. You need to be earning money more quickly than you are spending it. This available cash can then be used to work on expanding your business.
You need cash to grow your business and managing receivables poorly can greatly hinder your ability to expand. You do not want to become a bank whose profits are dependent upon loans. Instead, work with your accountant and understand both your receivables and cash flow to ensure that you have the resources and space to grow.