In business, "cash flow is king." Surprisingly most businesses leave their cash flow to chance, paying little attention to it until there is a problem. Regardless of your cash flow situation, this report will help you to turn unpaid A/R into cash.
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
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business owners can take to help resolve delayedaccount
receivablepaymentsand increase cash flow.
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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
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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
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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.
