Account Receivables
First you should manage your expectations when forecasting your revenues,
expenses and cash flow. Assume that your income will be received two months late
and your expenses will be paid two months early. Also expect that your account
receivables will equal one to two months worth of your expected sales. It will
be typical for your clients to pay you as late as possible. They are also
running a business and trying to manage their cash flow.
You can manage your account receivables to some extent.
- Be prompt in sending out invoices. Some of the buildup in A/R is simple a
delay in your getting out the bills.
- You can request a down payment from the client. This could be anywhere from
2 0 to 50% of the total bill. The more you get up front the better your cash
flow situation will be.
- You can hold off the final step of the project if the client has not paid an
appropriate amount of the balance due. Once you have completed the work, you
have less leverage in collecting the money. I would not over emphasize this
because you could face a contract law suit.
- You could do great work. Most customers are willing to pay for work that
they really appreciate. If you face a challenge during the process, do your best
to fix the error and manage the client’s expectations.
- You can qualify the customer before you do work. You could ask for
references or a credit report.
- You could refuse to do future work for or sell more product to those
customers that have been difficult to get money from in the past.
When you segment your existing customers, the speed in which they pay bills
should be a factor. If you do $12,000 in sales with a particular customer, but
they take 90 days to pay you, you are in essence giving them a free loan for the
amount they owe you. The interest cost in this example could be close to $720.
If your profit margin is 20% then you should have made $2,400 but instead only
made $1,680 from this customer.
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