In the previous two posts, we’ve discussed a bookkeeping term called accounts receivable turnover and how to measure it, and we’ve explained why having a good ART is important to your small business financial planning.
The question now is, what steps can you take to make your ART higher? The answer to that is a big part of the answer to the question of how to maintain a cash flow that is not just adequate but that keeps your business finances running smoothly and impresses potential lenders or investors, if and when you are looking for business capital.
First of all, remember that the only sales that factor into your ART calculation and that can bring your ART down are credit sales. Just to be clear again, that does not include sales paid by credit card, because in those transactions it’s the card issuer who is extending credit to your customer, not you. In fact, getting as many customers as possible to pay with cash, credit card or a wire transfer is the best way to avoid extending too much credit for too long. Shifting more of your business to those payment alternatives can be as simple as using a “suggestive selling” technique and asking each customer “Would you like to pay with cash, credit card or wire transfer?”
Of course, if a customer chooses to be invoiced, and assuming that you have and want to keep the option of paying from an invoice, you need to set reasonable terms. Reducing your payment terms from net 45 to net 30, or from net 30 to net 15, should improve your cash flow and lower your ART. Just be sure to make your established customers aware of your tighter payment terms, and do so at the time of or before their next purchase. Don’t have it be an unpleasant surprise when they receive your invoice. Be careful when reducing payment terms, however. If your competitors offer significantly more generous terms, it could drive some of your customers to them.
Naturally, you should find ways to streamline your invoicing process so that invoices are generated and sent as quickly as possible after a sale. Electronic or e-mail invoicing is a great time-saver, if it’s available to you. Following up with customers by phone shortly after an invoice is sent is also a good idea, at least for your largest invoices. For a mailed invoice, wait a day or a few days, depending on the distance it has to travel, and call the customer’s accounts payable person to make sure the invoice was received. This is an especially good practice to follow for customers with a record of repeatedly paying slowly or late. Do not hesitate to resend an invoice that appears to have been lost in the mail (or the mailroom), but make sure that it’s identified as a duplicate intended to replace a missing invoice. It’s best to use a copy of the original invoice bearing the same invoice number.
Two other methods can also get you paid quickly and reduce your ART. First, consider giving an incentive for extra-quick payment. For example, if you allow net 30 payment terms, offer a set percentage discount off any invoice paid within 10 or 15 days. Second, make a policy of requiring a deposit on larger transactions, if you can do so and remain competitive. Having a deposit in hand means that you’re extending that much less credit, which means that your outstanding accounts receivable will be that much lower from the get-go.
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