Only enter numbers as shown in the examples below.= Sales
= Accounts Receivable
A/R Turnover Ratio =
A/R Turnover Days =
Managing Accounts Receivable
The idea of running a business is to get paid for the products and services you render. Extend credit to customers is a wonderful gesture and can bring in more business. However, it’s important to be smart about doing it. Let’s talk about some ways to increase your accounts receivable ratio.
- Create a tradeoff for extending credit. Once in a while, I’ll get a client in my office who offers credit or wants to offer credit to their customers. However, they haven’t thought about monetizing the value of offering credit. Instead, they take the uncle or grandma role to extending credit to customers. That is, they have no interest associated with the borrowed money. It’s nice to extend credit to customers, as it can encourage customers to complete the sale, purchase more, or even help create loyalty. However, you’re not grandpa or their aunt. It’s okay to charge interest on accounts that aren’t paid within a certain time. Just be sure to follow the credit laws when extending credit.
- No penalties for late payments. Again, you’re not a relative doing favors. You’re a business owner. As such, consider charging late fees. Companies who don’t have late fees put themselves at risk to being on the bottom of the totem pole when it comes to satisfying debt. Make your debt important to the customer.
- Discounts for satisfying debt early. You might even consider offering a discount for customers who satisfy their debt in full early. This works great in the service industry, particularly for customers who’ve transitioned into the realm of client. For example, you might offer a 2%/20 Net 30 discount (2% discount on bills satisfied within 20 days with the full bill due in 30 days). It’s a way of saying thank you for your business and for being a good business partner.
- Rewards for satisfying debt early. This works very similarly to the discount. However, you might offer a reward in the form a store credit. In essence, you turn your store credit card into a reward card. Not only do you get paid on time, but you also have given your customer a reason for returning.
- Extend credit selectively. Just because someone is willing to spend more money, if they can put it on credit, doesn’t mean you should extend credit to them. Don’t be afraid to run credit checks prior to offering credit.
- Send notices. I’ve had clients who extend credit, but never send notices to their clients. Then they fail to understand why their clients haven’t paid the bill. If you’re not receiving your money on time, YOU need to reach out to your customer. Perhaps they did sent the payment, but it’s lost in the mail, sent to the wrong address or bank account. The customer may think the debt is satisfied, but because you’ve failed to keep in contact, a huge mess may be brewing. Or perhaps the customer didn’t send a payment and you’ve become out of sight, out of mind. Either way, you’re not seeing the money because of poor communication.
- Clear credit policies. I’m saving the best for last. Regardless of the methods you implement to manage accounts receivables, I high encourage you to set clear credit policies. All the methods you choose to use above, should be outlined in your credit policies and provided to the customer.
What policies do you have in place for extending credit?