Accounts Receivable: Managing Your Money

Managing the money that you are owed for your services is the most important thing that you can do as a business owner.
By Nathan Williams

Accounts Receivables (A/R) is the money due to a company for goods or services delivered but not yet paid for. When a customer does not pay cash at the time of service, it is called a Credit sale. When a customer pays at the time of service it is called a Cash sale. Credit sales are included in your A/R until the invoice is paid. A/R is considered current assets if they can be expected to be paid within a year. Your accounts receivables need to be actively collected because you need to turn them into cash. Your banker will judge what kind of a businessperson you are on the way that you manage your accounts receivable. Remember, your goal is to turn your A/R into cash as soon as possible.

Creating an Invoice
In order to keep track of who owes you for credit sales within a time period, create an invoice for your customer(s). Keep in mind that:

1. Invoices and statements are not the same. A statement is a record/summation of generated invoices. When customers pay, they pay an invoice.
2. Customer X owes you money because it was not a cash transaction.
3. You can find where and how long Customer X has owed you money by running an aged accounts receivables report.
4. The aged accounts receivables report will detail all owed monies to the company.
5. The aged accounts receivables report can break it down into sections that list the funds that are current, up to 30,60,90 days and overdue. You can find this report on your QuickBooks Online by clicking: Reports->Accounts Receivable Aging Summary
6. In reviewing the aged accounts receivables, you can see both the total moneys owed to the company, how old the account balances are and the totals for each aged section.

For example:

 

If you have substantial dollars on your aged A/R and you go to your banker looking to increase your line of credit, the banker might look at you cross-eyed. Why would the banker give you money if you had the needed funds in your 61-90, 91 and over A/R? Profits are not real until the money is in the bank. You must be able to turn your A/R into cash.

Accounts that are more than 30 days late need to have someone tending after them; collections may need to get involved after the funds are over 60 days late. You are wasting time and money if you do not turn your A/R into cash. Ignoring an A/R issue is like stealing from yourself.

Valuing your A/R
Many times, a business can take a loan against their A/R. The lending institute will determine what and how much can be borrowed against your A/R by looking at the age of your A/R. Banks tend to borrow a percentage of your collectable A/R. The valuation will be close to 100 percent for funds that are owed the company in the Current, and 1–30-day category, 31-60 might have a valuation of 50 percent, and over 60 days might have a valuation of 0 percent. If you are good at converting A/R into cash, a banker will be more willing to extend your line of credit. Lines of credit are important tools when timing issues between expenses and revenue happen.

Get old A/R off your books. When you are looking at your balance sheet, A/R will be included in your Current Assets. If you have old A/R on the books, that is not going to be collected, then it is time to send it to collections and write it off your books. If you are actively working to collect all your A/R, then you might want to discount it like a bank will. It is important to have as realistic numbers of funds that are going to be collected because you need to have accurate facts to make good business decisions.

Not all your invoices are the same. For example, a residential roll-off customer needs to have terms of funds due at time of service. Why? As soon as you pick up the box, they have little incentive to pay you. In this case, a residential roll-off customer that has funds owed after 30 days need to be discounted heavily.

When it comes to residential trash customers, you have an ongoing relationship with them, and the likelihood of them paying you is higher. In this case, a hauler can feel comfortable about payment up to 30 days after the bill goes out. After 30 days the residential trash customers need to actively be pursued for payment and discounted accordingly.
Commercial accounts can run the spectrum of days in which you need to become concerned. If you have the pizza shop that always looks like it is going out of business, you need to make sure that you are one of the first checks that they are cutting every month. The opposite end of the spectrum in this space would be the school
contract or city hall. Contracts like a school can have terms where you are must wait on funds 60 days or more to get payment. The nice thing is that you know that a school is not going out of business and that you will get paid. When you do have a contract where you do not get paid until 60-90 out, mark up the fees charged to cover your cost of borrowing. If a bill is $1000/m, at 5 percent borrowing costs, you can add an additional $5 to 25/m.

The Psychological Factors
I know that some people might be afraid to collect funds that are due. I understand that this conversation can be uncomfortable. A few things to think about:

1. If you want to be taken seriously as a business owner, you must collect all funds due to you. People and companies will not take your business seriously if you do not take your business seriously. Taking your business seriously means that you collect the money.
2. When A/R goes unpaid it reduces your opportunity to do needed things with those funds. The money can be used to pay down your line of credit, buy more commercial trash bins, or allow you to sleep better at night because you can see the cash in your bank account rather than on your balance sheet. (This is a real thing!)

Action
Some people reading this might think, “Great information, but what can I do about it?” Good news, there are measurements to understand your A/R situation.

1. Turnover ratio: This ratio will tell you how many times you turn over your credit sales in each time-period. This is usually measured over a years’ time. Waste Management shares this information in the investor information section. WM shares that they turn their credit sales over about 6.5 to 7 times per year.
2. Days Sales Outstanding: Day’s sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment for a sale. DSO is often determined on a monthly, quarterly or annual basis. It is better known as average collection period; the data shares the average number of days it takes to collect the credit sales.

Here is a video that gives a good explanation of the information shared: www.youtube.com/watch?v=07G5DiJqfC4.

Credit sales are an important aspect of most business. Managing the money that you are owed for your work is the most important thing that you do as a business owner. Not collecting is the worst of all business worlds because you have all the expense of operations and none of the funds to pay for it. If it is worth doing it is worth
measuring. So, dig in and make some calculations and track them over time. You will be glad you did. | WA

Nathan Williams is Owner of Trash Joes, offering business tools for haulers that help them get new customers, retain existing customers and get paid faster. At Trash Joes, they understand the need to convert funds into cash and have developed tools and systems to help. Give them a call or send an e-mail, they will be happy to share some best practiced based on your business. Nathan can be reached at (912) 428-5637, e-mail [email protected] or visit www.trashjoes.com.