Also called Debtor Days, this is the number of days on average, your customers are taking to pay invoices. Think ‘cash-flow’ with this key number. Managing this number can have a huge impact on cash flow.
If for example your Accounts Receivable Days* is currently 70 days and you can get it down to say 50, you could put tens of thousands of dollars back into your bank account.
The way to improve this number is to focus attention on your Accounts Receivable (AR) and debt collection procedures. It’s fine to look at the report out of your accounting system, which lists all the customers and how much they owe you. If your business is growing rapidly you need to know how much AR Days are changing compared to Revenue growth.
If it’s not comparable … you will experience a cash flow squeeze … and could run out of working capital.
Chasing payment is often one of the least enjoyed jobs in business. Think of it as your money sitting in other people’s bank accounts and collecting it quickly can make a huge difference to your cash flow.
Here are nine ways to speed up customer payments:
- Create a terms of business document: Ensure you have clear and documented terms and your customers understand what they are at the point of sale.
- Credit Checks: Check who you are doing business with. Are they a potential bad debt?
Run credit checks and assess how they operate if a a business customer. If the account is a large one it doesn’t mean to say the client is solvent. Big companies go bad too and hurt more little ones when they do.
- Improve customer relations: Have good customer relations to ensure your invoice is a priority.
- Invoice immediately: Ensure the payment due date is included, so there can be no confusion or excuse. Why wait until the month end to invoice and give customers as much as 30 days more to pay?
- Manage credit better: Get a credit management system in place. Report regularly on outstanding customer amounts, so that you know who to chase and how hard. Measure who owes what and for how long.
- Follow up appropriately: Small amounts by email and larger amounts with a telephone call. Have one person in your business that is responsible for doing this. A part-time accounts receivables clerk could pay for themselves, because they collect more and improve the cash flow. Calculate how much.
- Make it easy: Make it as easy as possible to get paid. Credit card merchant fees could cost a lot less than waiting for a bank transfer for 90 days. Have clear systems and processes in place.
- Progress Payments: Seek progress payments or deposits if it’s a job that takes a while.
- Get tough: Don’t write off collectible debts too easily. This happens far too often. There are good debt collectors around.
Note: In our QuickCall business example – every 1 day improvement here would add $2934 to the cash flow.
|*Accounts Receivable Days
This is the number of days, on average, it takes your customers to pay you.
Example Accounts Receivables $ 145,000
Annual Revenue $1,000,000
Time Period 365 days
145,000 / 1,000,000 x 365 = 53 days
Look out for our next blog post for more detailed information about each of the Seven Key Numbers and ways to improve them.
If you don’t want to wait for the next blog post and you’re keen to get started improving your Seven Key Numbers right now…