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Cash crunch? These simple habits improve accounts receivable turnaround – Part I

Accounts Receivable, the money owed to you from your clientele, is the lifeblood of most businesses. Although failure to collect receivables is a HUGE issue, even a potential game-ender, this is an area where many businesses flounder. Recently we saw a textbook accounts receivable “what not to do”, so we will use this unfortunate example as an educational aide.

Bob Businessowner (not his real name) has a small firm; they typically contract, complete the work, send an invoice and then wait for the money to come rolling in. But what happens when Bob’s client doesn’t pay for 60 days, 90 days… a year and a half? Well, that puts Bob in a bind; he has already bought the necessary materials, footed the bill for the labor, provided all the necessary equipment and is now out of pocket until his client pays up. It makes sense that Bob would do everything in his power to get that money back into his bank account pronto, right? But in this case poor Bob had every misstep imaginable, things that many business owners do every day. In this four part series we will use Bob’s misfortune to learn five easy habits that we can adopt to improve our accounts receivable collection timeline.

Invoice Cycles – Many business owners like the efficiency of invoicing their clientele all at once, when it is convenient to their schedule. Bob always does his invoicing on the 7th of the month. In the case of this particular example, his work was completed August 12th and he invoiced his customer on September 7th. As we can see nearly a month has passed from the time that Bob incurred the costs to complete the work until the invoice was actually generated. Bob’s standard terms are “Net 10th” which means that the earliest Bob could reasonably expect to see payment of this invoice is October 10th, a full 60 days after the work was done.

Now here is the real kicker, Bob’s customer has a “pay-when-paid” agreement, so they will not pay Bob until they invoice their client and are paid on their invoice. This is going to be rather inconvenient for Bob since his customer invoices on the 15th of the month and wouldn’t you just know it, Bob’s invoice didn’t show up in his customer’s mail in time to be included on the September 15th billing. Bob’s money isn’t going to be invoiced until his customer’s October 15th billing. Then tack on 45 days for the customer’s client to pay, a few days for the customer to process payment back to Bob and it looks like Bob won’t see any cash until December, leaving Bob out of pocket well over 100 days.

Bob could have dramatically reduced his turn around by knowing ahead of time that his customer invoices on the 15th and adjusting his invoicing habits to comply with that timeline. Delivering his invoice via email the morning of August 13th could have gotten Bob included on the August 15th billing, and he could have been paid in early October. The minimal additional effort necessary to generate an invoice on his customer’s timeline could have saved Bob 60 DAYS out of pocket on the job.

Was the invoice schedule Bob Businessowner’s only foible? Stay tuned for the continuation of Bob’s adventure on the next installment in this four part series which will highlight another easy habit you can adopt to improve AR turnaround time. In the meantime, what steps can you take to avoid making the schedule mistake Bob made? Can you identify a customer or account in your business that could benefit from a modified invoice schedule?