Keeping track of accounts receivable gets more difficult as a company grows. It is normal for accounts receivable to grow along with revenues. So the larger a company gets, the more it needs effective ways to track receivables so as to manage cash flow. Tracking can be helped considerably by creating an aging schedule.
Imagine a company experiencing cash flow problems. They aren’t quite sure why. Common sense dictates that the company isn’t getting paid fast enough. But maybe that’s not it. Perhaps it’s a matter of spending too much. How would management figure it out? The starting place would be an aging schedule.
Aging Schedule Basics
An aging schedule is a paper or digital record that tracks how quickly customers are paying their invoices. It groups invoices by age. So let’s say your normal terms are 30 days. Let us also say you offer a discount for customers who pay within 10 days. Your aging schedule might include five categories:
- 0-10 days (your favorite customers)
- 11-30 days (customers who pay according to terms)
- 31-60 days (late customers who may need follow-up)
- 61-90 days (late customers requiring more aggressive follow-up)
- 90+ days (late customers unlikely to pay; i.e., bad debts).
Creating an aging schedule involves dividing up customers into categories as a percentage of the total. All the percentages will obviously add up to 100%. If fewer than 50% of your customers are paying within 0-30 days, the chances are pretty good your cash flow problems are the result of not getting paid quickly enough.
Solutions to Your Problem
So, what do you do if customers are not paying fast enough? There are multiple solutions, beginning with invoice factoring for small business. As a type of account receivable financing, invoice factoring involves selling invoices to a factoring company at a discount. That discount is represented in the factoring company’s fees.
Invoice factoring is a way to keep cash flow consistent. But it ultimately costs your company money. It is a perfectly legitimate form of AR funding on an as-needed basis. But if you are constantly having to sell invoices to keep cash coming in, you need to look at other solutions as well. We can recommend a few:
1. Reduce Your Terms
A certain number of customers will always pay late. Likewise, there will always be those who, while they pay according to terms, stretch it to the limit. You might find your cash flow improves if you reduce your terms. If your current terms are 60 days, reduce them to 30. If you are at 30 days, reduce them to 15.
2. Establish a Follow-Up Schedule
Some of our clients have improved the speed at which they get paid simply by establishing a regular follow-up schedule. Note that follow-up isn’t just for customers who pay late. Following up 5 to 7 days after billing can actually encourage customers to pay early, especially if you include a reminder of your discount in the follow-up message.
3. Reduce Credit Limits
You can be a bit more aggressive and reduce your customer’s credit limits. They get the same terms, but they are not allowed to purchase as much on credit. In some instances, the need to maintain decent credit is motivation enough to pay on time.
While you’re working all of this out, including creating an aging schedule and reconsidering your terms, remember that Thales Financial can help with invoice factoring for small business. Contact us to learn more about how you can turn outstanding invoices into immediate cash. We can help you meet your short-term financing needs.