Among small business owners polled one of the worst jobs is calling customers and asking for past due payments. But, after all, cash flow is everything. You can not run your business without cash flow.
Do you know your average receivables turn over ratio? Also known as the Average Receivables Collection Period. Below is a simple calculation to help you figure it out.
Thanks goes to QuickBooks Pro Kat Wakula for this marvelous discussion on Receivable Collection and Management! >>
When you allow customers to pay over time (Net 10, Net 30) you basically are extending credit to them. This ratio can determine your financial stability. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. A high ratio can lower the value of your company. But more importantly, you can’t stay in business if you aren’t collecting from your customers!
Having a system for collections must be part of your regular routine especially in this economy. Here are some simple rules to follow:
- Contact your customer once services are completed, even if this is regular work that you perfom. Make sure your customer is happy with the service they received, ask if they have any questions or problems. Inform them you will be sending out their invoice and them and let them know the terms and the forms of payment you receive.
- Offering a discount of say 2% for paying within 10 days, is a good way to encourage early payment.
- For service businesses don’t be afraid to go ahead and ask how if they would like to pay this bill with a credit card right now.
- You can also ask if they would like you to keep their credit card information on file to make payments in the future.
- Set up your bookkeeping to report your recievables by aging.
- Send out a statement to customers with multiple invoices due.
- A phone call is made to customers for each invoice that is not paid 30 days from the invoice date.
- Start out by asking if the customer has the invoice. Then ask if you can get status of when the payment will be received.
- Have an area in your customers file to keep notes on your conversations. (Quickbooks offers an area for notes with a date stamp in the Customer Center)
- If you haven’t received payment or a clear answer from your customer follow up in a week asking again if you can get status.
- Having the notes handy is a good way to remind the customer of your last conversation. For instance you can say, “last time we spok eyou stated you would send out a payment on Friday, we haven’t received it yet. Were you able to get that in the mail.
- Continue to follow up on a regular basis.If they say they willl send it in two weeks and you do not receive it call them back.
- Be cordial and friendly and never confrontational. If the payment starts pushing past 45 days, offer a payment schedule. Perhaps split the payment into two or three payments.
- Have a strict policy about performing more work for a customer that has a past due balance with you until the account is brought up to date. This will ensure you do not extend even more credit to a customer that is not paying or is a slow payer.
So don’t be afraid of loosing business by asking for payments in a timely manner. If the you have provided excellent customer service to your client they will have no problem paying you. You have provided a valuable service and you must keep your cash flow up to continue to stay in business. And remember the squeaky wheel gets the grease!
Average Receivables Turn Over Ratio Calculation
Collection Period = Accounts Receivable X 365 days
Collection Period = 365 days
Accounts Receivable Turnover Ratio