It’s essential to have positive cash flow in your small business.
Cash flow impacts your small business success in several ways including your business credit score, your ability to get a business loan, and the day to day functioning of your business.
To keep your accounting records in the black, learn how to stay on top of money owed to your small business.
3 Side Effects If You Fail To Collect Money Owed to You
Not collecting the money owed to your small business can lead to myriad of problems:
- One way that poor debt collection practices can negatively affect your business is your credit score. Your business credit score is partially calculated by a determination of the ratio of business income compared to your business debt. When the ratio become heavily tipped on the side of debt versus income, as it would be when you’re not collecting money owed to your business, your business credit score drops.
- Another side-effect of failing to collect debt on a timely basis is an inability to get a business loan. Loan officers want to see that you have a consistent and positive cash flow coming into your business coffers. If you have too much money in your accounts receivable column compared to your bottom line, this can indicate to the loan officer that you aren’t well equipped to handle your finances. Banks aren’t too eager to lend to people who don’t know how to handle their money.
- Finally, failing to adequately collect money that is owed to your business can negatively and dramatically affect the day-to-day functioning of your business. As a business owner, you know that you have certain recurring expenses related to running your business. Maybe you have to pay for daily food deliveries, daily fresh flower deliveries or for your chef’s morning purchases from the fresh market downtown. Whatever those daily expenses are, you won’t be able to make them without positive cash flow.
Improve Your Accounting Measures
As the article, “5 ways to build a stronger payer/practice relationship” notes, being on top of the funds owed to your business (no matter what industry you are in) is critical.
For a list of recommended ways to correctly handle your accounts receivable, you need to:
At no time should your overdue accounts receivables should be no more than 5% of your total gross income from the previous year. So if your business grossed $200,000 last year, your past due A/R should never exceed $10,000. That’s a maximum, and the less you can get near that number, the better off you’ll be. When you reach that 5%, you need to take immediate and swift action.
Use Fair Collection Practices
As accounts become overdue, use fair collection practices like sending past due statements in the mail as opposed to harassing clients with phone calls. Be sure to include a line that states, “if you’ve already paid this balance, please disregard this notice.”
Follow up on Overdue Bills Quickly
Once a bill has become overdue, don’t wait before sending out a past due reminder. Assume that the client has forgotten the payment, not that the check is in the mail. The swifter you pounce on overdue bills, the faster you’ll get paid.
If your clients aren’t paying you on time, it’s your responsibility to fix the problem.
The very survival of your small business depends on it.
About the Author: Kate Supino writes about best business practices.