In our previous blog, we talked about the second ingredient that you, as an SMB owner, should consider when reviewing the financial reports for your business – which was ‘Tracking Expenses.’ Now in this blog, we will delve into detail about the third ingredient to consider which is, ‘Accounts Receivable.‘
By definition, accounts receivable is the amount that is owed to a company by its customers. It is the sum of unpaid invoices, and is an important line item to note on your financial reports, Accounts receivables, like cash, are considered assets. However, unlike cash, high amounts of accounts receivables are definitely not considered good. If your company’s accounts receivable balance is large, that means you have a lot of money owed to you by your customers. A sharp increase in the accounts receivable line item on a financial can certainly be a likely indicator that the company is issuing credit to riskier customers.
Did you Know?
93% of businesses get late payments from their customers
An auto parts store owner who recently partnered with us had over $5,000 in accounts receivable. He did not have any visibility into this data due to previous unavailability of timely financial statements. Once we started working with him, providing him with monthly financials and started pointing this line item out in our monthly reviews with him, he realized that this was a major issue in his business that he needed to address. We talked about the importance of maintaining the visibility on these kinds of risks through our monthly reviews and also discussed some best practices for extending credit to his customers as well as strategies for going out and collecting that money sitting out there due from customers. By simply providing this client with access to timely financial information and talking through those strategies ad best practices he was able to turn around and collect $2,000 of that outstanding AR balance just in less than one month.
Did you Know?
On average, companies write off 1.5% of their receivables as bad debt each year. For a $50M company, that means a $750,000 expense every year!
So, my first advice to you is to make sure you are looking at timely financial statements on a monthly basis and make sure that you are watching that Accounts Receivable balance. If that balance is high, or you see it steadily increasing, then it’s time for you to start making some calls and collecting the money that is owed to you. In addition to this, some of the critical accounts receivable metrics that you should track diligently are listed below:
- Days Sales Outstanding
- Turnover Ratio
- Number of Days an average payment is overdue?
- Collection Effectiveness Index
- Number of customer invoices that are being revised
“What gets measured gets improved.”
– Peter Drucker
If your company’s current Accounts Receivable processes and system are not robust enough to give you these insights and metrics, now is the perfect time to improve and upgrade to a more powerful accounts receivable solution.
In the next blog, I will delve in detail about a fourth key ingredient of a financial report, i.e. ‘Accounts Payable‘.