Published on December 6, 2016
1. SURVIVOR GUIDE ON HOW TO INCREASE YOUR COMPANY’S Unpaid invoicescan create major headaches for small business owners. Fortunately,there are options. Here are several steps
2. Survivor GUIDE on How to increase your company’s Page 1 business owners can take to help resolve delayedaccount receivablepaymentsand increase cash flow.
3. Survivor GUIDE on How to increase your company’s Page 2 Delayed accountsreceivable can really hurt your bottom line Getting paid on time is essential. Most small businesses operate very close to the margin. More than half of small business owners worry about cash flow every month and just about all of them experience dealing with unpaid invoices. Unpaid invoices equal unrealized cash flow. The longer an invoice goes unpaid, the more likely it will become lost income. Collection agencies know this. This is why over time they try to collect on an aging debt by reducing the original amount due, or by making attractive payment arrangements available. Some good news Accounts receivable (AR) are real assets. As such, they have real monetary value and business owners have options. Like any asset, however, AR deteriorate in value as time goes on. To get maximum return on unpaid invoices, business owners need to act quickly. Go after the easy one’s first Most small business owners don’t have the time or resources to chase unpaid invoices, and many feel uncomfortable doing so. Your bookkeeper is an ideal resource for helping you to get paid. If your bookkeeper is involved with your company’s AR, they are already familiar with your customers and with which invoices are outstanding. Your bookkeeper can act as a third party, which can also help to keep the relationship you have with your customer from becoming awkward. Ask your bookkeeper if they would be willing to help, and offer them a percentage of any invoice they collect on. There is accounting software available specifically designed to go after unpaid invoices automatically. These programs can be customized to email pre-written reminders to vendors, or clients, as their accounts become due, and then again when they become past-due. These simple communications are sometimes all that it takes to get clients to resolve unpaid balances. What to do with aging accounts receivable
4. Survivor GUIDE on How to increase your company’s Page 3 When debtors don’t respond to reminders or phone calls, small business owners often feel frustrated. Often business owners give up and are quick to write-off the invoice as a bad debt, but before doing so, there are several options. Business owners can outsource their AR to third-party companies in an attempt to get paid for at least some the unpaid balance. Here are several options: accounts receivable factoring invoice discounting using a debt collection agency 1. AR factoring (or invoicefactoring) You can sell your unpaid invoices to a factoring agency. Typically, when you engage a factoring company, you’ll be paid between 75 and 90 percent of the value of the invoice within one to two business days. Invoice factoring has gained more attention and popularity over the past few years. With invoice factoring, the factoring company will become the owner of the invoice and like a debt collector, they will aggressively pursue payment. If they succeed in getting paid, they will reimburse you, minus an agreed amount to cover their fees. Advantages of invoice factoring: You receive quick access to cash flow. There is a guarantee of some of the revenue for goods or services sold. Disadvantages of invoice factoring You won’t get the full value of the original invoice. The factoring company can communicate directly with the debtor, which could harm your relationship with that customer. 2. Invoice discounting Some finance companies will loan your business money, using your invoice as collateral. When the invoice is finally paid, you can use the money to repay the loan. These companies typically loan only up
5. Survivor GUIDE on How to increase your company’s Page 4 to 80% for invoices under 90 days old – and the amount goes down from there because the older the invoice, the less likely it is they will be able to collect. Notably, you retain ownership of the invoice. This means you are still ultimately responsible for collecting the debt. You will be charged interest on the loan and in many cases, a fixed monthly fee as well. This service may only cost you a few percent of the value of the unpaid invoice, but that can change dramatically depending on your location, and whether or not the invoice is eventually paid. Advantages of using invoice discounting: You get quick access to cash flow. You stay in complete control of the customer relationship. Disadvantages of invoice discounting: You won’t get the full value of the invoice. You will still have to do some legwork to collect on the debt. This option is typically available only for larger commercial invoices (not consumer or retail businesses). 3. Debt collectors Debt collectors can play a role in resolving unpaid, overdue invoices. Debt collectors generally charge a high rate because they typically try to go after very late, high- risk debtors. They deal directly with the debtor, so you will lose control of your customer relationship. For these reasons, debt collector agencies should probably be a last resort. 4. When to consider accounts receivable financing Obviously a business owner needs to be chasing reasonably large invoices to justify using these services. Otherwise there won’t be enough margin to pay the collection agency or factoring company.
6. Survivor GUIDE on How to increase your company’s Page 5 The debtor’s credit rating is also important. Factoring companies will not get involved if the risk of non- payment is too great. This is another reason to get credit reports on your customers – especially when large sums are involved. Finding the right accounts receivable financing company Accounts receivable financing is also an option. Finding the right finance company is critical. Make sure their rates and fees are clear If an accounts receivable factoring company makes it hard to figure out their rates and fees, pass them by. It is important to know exactly what rate and fees will apply, so there are no surprises. Make sure you know what you will be receiving before signing any agreements Find out in advance what percentage you will receive on invoices they collect on. This will change depending on the creditworthiness of the debtor, but you should still be able to get some idea of what to expect. The percentage has to be low enough if this is really going to help increase your cash flow. Accounts receivable financing can really help to boost your cash flow In summary, to grow competitively, and to succeed in today’s marketplace, your company has to have a significant cash flow to meet its expenses, operation costs and to purchase new inventory. Unpaid invoices (AR) are assets that have actual value that can be used to leverage cash flow. 5. Offering a discount for early paymentscan also help to boost your cash flow It is worth mentioning that many companies offer a 2-5%discount to customers who are willing to pay for their outstanding invoices faster than the terms they have agreed to, within 7-10 days of the date the invoice was received. It doesn’t sound like much, but on a larger invoice it represents a considerable savings and is often just what is needed to get clients to pay attention. ©2016 My Bookminder - mybookminder.com