If you own a small business, you're well aware that the quick collection of receivables isn't just a convenience it's a necessity. It's also more of an art than a science. Once you become a true artist at collecting receivables, you'll find yourself doing business with other people's money and you'll turn your business into a cash-flow masterpiece.
Collect fast, pay slow. How can you do business with other people's money? By following one simple strategy: Collect receivables as quickly as you can and pay accounts payable at a pace that lets you keep your cash as long as possible without jeopardizing your creditworthiness.
You can succeed in this strategy by sending out your invoice even before you ship your product. Suppose, for example that your invoice date is March 15, and your terms are net 30 days. Even if your customer doesn't receive the goods until March 18, their accounts payable department will use the March 15 invoice date to set up your payment allowing you to be three days closer to payment right from the start.
So far, so good. Now, consider what happens if you can get 60-day terms from your supplier; sell your product on a net 30-day basis, and then collect quickly. You'll be getting paid from your customers before you've borrowed, in effect, at no cost. In other words, you've done business with other people's money and that kind of bottom line will put you right at the top.
Of course, saying you're going to get your receivables in quickly is one thing, and actually doing it is another. But there are things you can do to stack the receivables deck in your favor:
Establish your payment terms up front. Right after you get your first order from a new customer, you need to set your terms. You'll help our cause by calling the customer a couple of weeks before the due date of the first invoice to thank him or her for the order. At that time, find out if they got the order in good condition. Remind them that the payment is due by the date indicated on the invoice, and that you expect prompt payment.
Learn your customer's payment schedules. You'll find that very few companies pay their vendors daily. Most of them have a set date for cutting checks, either once a week or once every two weeks, and it's pretty much impossible to get them to deviate from their timetable. However, when you learn your customers' payment schedule, you can hasten your receivables by working with their system. For example, when you have a large payment due, call your customer a few days before the scheduled check-cutting date and ask if your invoice is clear; complete and acceptable.
Be persistent. You may encounter some customers who are slow payers, but not really "collection problems." When dealing with these customers, be firm, but not so hard-nosed that you risk losing their business. If, for example, your terms are net 30 days, call them up on day 31 to set up a payment schedule. You may need to make a few calls, or even send some letters, but you will get your point across that your business cannot afford to let receivables linger.
Once customers get past 60 days however, you re facing a collection problem, and you'll have to decide whether to restrict credit, use a C.O.D.-plus system (you deliver products C.O.D. and ask for an extra amount toward what's past due) or come up with another method of obtaining receivables. And if it gets past 90 days, you may need to start shopping for a collection agency.
The bottom line. Ideally, of course, it would be nice if you didn't have to go through the hassle associated with collecting receivables. However, it's part of the price of doing business and the better you get at bringing receivables in quickly, the faster your business can grow.
Valerie Meisel lives in Wilmington, Delaware, where she is a Personal Financial Advisor in the Advanced Planner Group of American Express Financial Advisors, Inc. Valerie may be reached at (800) 220-2190, ext. 226.
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4/25/97 Issue. Copyright 1997 by CAMP Rehoboth, Inc. All rights reserved.