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Improve Your Cash
Flow
Encouraging your customers to pay you
sooner rather than later is appealing for obvious reasons. But
did you know that cash flow may improve when you get paid
faster?
Cash flow - the lag time between cash outflows and
the receipt of incoming cash - is a critical factor in
business success. In fact, poor cash flow management is a
common reason for new business failures. Accelerating cash
inflows can improve cash flow by closing the gap between the
date bills are due and the date of sale.
An example helps illustrate this point. A small clothing
boutique places an order for its fall line in May. 25% is due
when the order is placed, and the balance is due 30 days
following receipt of the order. The store must pay for the
entire line before it can sell enough clothing to make up the
cost.
When autumn arrives, the store places an order for spring.
It also extends special credit terms during its Labor Day
sale. This causes a delay of cash inflows, making it difficult
to cover current obligations. The store manager should pay
special attention to collecting payments quickly in order to
cover the gap between cash outflows and cash inflows.
QuickBooks has several features expressly designed to help
you improve cash flow.
Manage Your Receivables
If you carry
accounts receivable, you can improve cash flow by managing
your accounts effectively. Effective A/R management begins
with the establishment of a credit policy. A written credit
policy helps you clarify when and to whom you are willing to
extend credit. It also establishes a credit agreement between
you and the customer. You can use the Manage Your Receivables
tool to build a credit policy.
Establish an effective credit policy
A
uniform credit policy can speed collections, save time,
simplify management and improve your chances to win sales.
Employees should know the policy and be able to communicate it
to customers. However, one person ought to have responsibility
for deciding about exceptions in special cases.
Your policy should reflect the standard in your industry
and the nature of your business. Try also to minimize the
administrative cost of tracking payments and making
collections. The simpler your system, the easier it is to
manage.
Establishing a credit policy involves decisions about
credit terms and managing receivables. QuickBooks makes it
easy for you by using the Manage Your Receivables decision
tool. Click "Establish a credit Policy" and answer nine
questions to create a standardized policy for your business.
QuickBooks will save your choices and allow you to make
revisions to the policy. When you're done, you can print the
policy for easy reference by employees or customers.
Manage Your Receivables also provides tips on how to best
use, analyze, and act on the information in Accounts
Receivable reports. With the Average Collections Period
calculator, you can determine whether slow collections are
adversely affecting your cash flow. If they are, you'll learn
what you need to do to make your billing and collections
efforts more effective.
Sometimes, difficult customers can thwart even your best
efforts at receivables management. Manage Your Receivables
also advises you on when to use a collections agency and how
to select one.
Bill and Get Paid Online
One way to
improve cash flow is to bill more quickly. By faxing or
e-mailing invoices and statements, you can bill customers
right after the sale. They receive the invoice or statement
within seconds rather than days, and you save time you'd
otherwise spend printing them and sending them through the
mail.
People often respond more quickly to e-mail and fax than to
paper mail, increasing the likelihood that you'll be paid
promptly. Sending invoices and statements online also gives
you an opportunity to raise and resolve questions or problems
quickly.
You can e-mail invoices, statements, and estimates without
charge from within QuickBooks. QuickBooks also offers a
service that enables you to fax your business forms as you
create them. QuickBooks now has a way for your customers to
pay you online. Once you register for QuickBooks Online
Billing, the invoices and statements that you e-mail can
include a link to the online payment service. This link takes
your customers to a secure Web site that enables them to pay
you online.
Accept Credit Cards
Accepting credit
cards does more than just provide your customers with a
convenient way to pay. It can also reduce or eliminate billing
hassles and costs, and save you several trips to the bank.
With the QuickBooks Merchant Account Service you can enter
credit card payments directly in QuickBooks and have the
credit card authorized online. The payment is then
automatically deposited into your bank account and recorded in
QuickBooks, making duplicate data entry a thing of the past.
You can also store customer's credit card information in
QuickBooks in a secure, encrypted format, saving you the
hassle of re-entering the same data repeatedly.
The QuickBooks Merchant Account Service can be used with
QuickBooks Online Billing. Use QBOB to send invoices,
statements, and estimates to your customer electronically.
Then, when they pay you online, use the QuickBooks Merchant
Account Service to collect and process their payment.
Learn More
Used together, the features
just described represent a powerful way to improve cash flow.
They make it easy for customers to pay you and even easier for
you to manage. Here's how the tools and services can be used
in conjunction with one another for maximum benefit.
Improve Credit
Management
Extending credit to your
customers can be risky, but often it would be impractical not
to offer credit. If customer expectations or the nature of
your business compel you to sell on credit, you need to manage
the risks.
Customers who pay late (or not at all) cost you money by
crimping your cash flow and directing your time towards
collections rather than making more sales. Ideally, the cost
of uncollectible bills should not be a significant cost of
doing business.
According to the American Collectors Association, bad debt
should amount to no more than 5% of your gross
profit-sometimes even less, depending on your type of
business. To keep your losses to a minimum and speed up the
collection process, you need to take the following
actions:
- extend credit sensibly
- keep an eye on your accounts receivable
- collect overdue bills promptly
Increases in the availability of credit are making it
easier and easier for many people to get into debt over their
heads. In 1998, one in twelve Americans filed for bankruptcy,
and consumer debt is still on the rise. In some industries,
small business debt is as high as 70% of net worth. Now more
than ever it is important to protect your business from the
costs of late and unpaid bills.
How can a credit policy help?
The only
surefire way to avoid collection hassles is to collect in full
at the time of sale. If you would like to extend credit, you
can prevent many potential delinquencies by establishing an
effective credit policy. A good credit policy spells out the
agreement between your company and the customer. It is your
job to make sure the customer understands and agrees to your
policy at the time of the sale.
An important part of any credit policy is to identify the
risk level of a customer - both good and bad credit risk
levels. Identifying bad credit risk prospects or customers
allows you to limit or avoid potential accounts receivable
problems and bad debt. Identifying good credit risk prospects
and customers could identify opportunities where you can
afford to offer better pricing or terms - enabling you to win
business which you otherwise may have lost to competitors.
Your credit policy should be easy for your customers to
understand and simple for you to manage. It should help you
identify good and bad credit risks up front and protect both
you and your customers from miscommunications. Used
consistently, a well-conceived credit policy helps you win
good customers and avoid the time, cost and frustration of
handling late paying customers.
Track what you're owed
In accounting
terms, invoices that have been sent but not yet paid are known
as accounts receivable (A/R). Actively managing your accounts
receivable can help you get paid faster. Good accounts
receivable management starts at or before the time of the sale
by the establishment and communication of your credit policy,
and lasts until you collect the money you're owed.
Collect overdue bills
Acting promptly
and decisively is the key to successfully collecting overdue
bills. In general, the longer a bill has been outstanding, the
harder it is to collect.
A strategy for dealing with past due accounts can simplify
collections and help you get paid sooner, and it's easier and
less time-consuming than dealing with past due accounts on a
case-by-case basis. Refer to your policy and act on it when
reviewing your A/R Aging Report.
It's a good idea to keep a record of accounts receivable
history, including the actions you've taken to collect on a
bill. Note when you took the action and the result or customer
response. Such a record can support your claims in the event
of a lawsuit. But more importantly, it aids your memory and
helps you communicate with your customer about the details of
their case. If you have more than one overdue account at once,
this can be essential to avoid confusion.
Actions to take first
Your policy might
have a longer time scale or fewer steps, depending on what's
common in your industry, your relationship with your
customers, and the amount of time you want to devote to
collections. Whatever your plan, you should follow up with
late paying customers quickly and repeatedly. In general, the
sooner you contact a delinquent customer, the more likely you
are to get paid. Use an escalating scale; begin with a
friendly attitude and become gradually more insistent and
formal in communicating that the customer pay their overdue
bills.
Avoid high-cost, low-return collections. Consider the
likelihood of recovering the money owed to you, the total
amount due, and how much it will cost in payroll and materials
to make the money materialize. The best way to reduce these
costs is preventative: be proactive by setting up a clear
credit policy and using it consistently.
If you've tried everything and you still can't collect on a
bill, it may be advantageous to hand the account over to a
professional collections agency. When and how you do this will
affect your chances of recovering the amount due.
When to use a collections
agency
Collections become increasingly difficult,
expensive, and unlikely the longer a bill has been
outstanding. Getting help from an agency early in the process
for appropriate cases can make the difference between
successful collection and a bad debt write off. Remember,
sending an account to collections without good reason may
alienate your customer. Do all you can to make it easy for the
customer to pay prior to handing over the account.
The recalcitrant, argumentative, or non-communicative
debtor is an ideal candidate for timely use of a collections
agency. You should also consider using an agency when:
- a customer is unresponsive to reminder notices
- the customer makes repetitious, unfounded complaints
- the customer denies responsibility for the obligation
- account delinquency coincides with serious marital
difficulty
- the customer has multiple delinquencies and frequent job
or address changes
- obvious financial irresponsibility is evident
- the debtor has moved to a new location
- the debtor fails to keep in contact
- your company has many bad debts or delinquent A/R
Professionals trained to deal with difficult debtors track
down overdue payments, allowing you to concentrate on running
your business. Most agencies make collections via letters and
phone calls, like you would. But third party intervention
sends a powerful message that you are serious about getting
paid.
Debt collectors have special resources to help them locate
customers that have moved. Agencies can also affect the credit
standing of the debtor, giving your customer another good
reason to pay. By law, debt collectors must adhere to strict
standards that limit the methods they can use to collect on a
debt.
Last resorts
When all else fails, it
may be time to consider collecting your debt through a
lawsuit. If the amount is under a certain limit-about $1500 in
most states-you can file suit in a small claims court without
the assistance of a lawyer.
If the debt is uncollectible and you don't want to pursue
it further, it's usually possible to take a tax write off for
the loss you incurred. Eligibility for this write off depends
on your accounting method: if you use accrual basis, you can
write off bad debt. Businesses that use cash basis cannot.
Ideally, you will never get to the point where you need to
take either of these actions. But it's impossible to forestall
every instance of uncollectible debt. If you find yourself in
need of help, you may wish to check with your
lawyer. |