My firm works with many professional service businesses that issue invoices to customers. While all of them prepare their tax returns on the cash basis (revenue is counted when received), we prepare the monthly reports on the accrual basis (revenue is counted when the invoice is issued). Reviewing monthly balances in Accounts Receivable (A/R) is very important.
So, why don’t small businesses make it a priority to review the A/R report?
When we begin to emphasize the importance of the A/R report, small business owners say things like:
• “I used to review it weekly but just got too busy.”
• “I’ve been so preoccupied with cash flow I haven’t had time to review it.”
• “What is A/R?”
Let’s start with a definition:
• A/R is what your customers owe you as of a specific date.
Easy enough. But why is it so important to stay on top of your A/R balances?
• A/R is future cash flow. If you’re too concerned with current cash flow to review your A/R report, you can now see that you need to stop reading this and review your A/R report immediately.
• A/R helps you predict your future cash position. Future cash flow = future additions to the bank account.
• If you let a customer get too far out with an invoice (60-90 days past due, for instance), the likelihood of collecting goes down exponentially.
When we assist growing and scaling small businesses, we emphasize the importance of tracking A/R for each customer as well as putting processes in place that allow the customer to pay as easily and as quickly as possible. For instance, take credit cards for payment; also, think about making ACH or auto-charging of a credit card a requirement for working with you. Customers will pay you so much faster if they don’t have to be the ones initiating the payments. You could get your A/R balances to zero each month with this simple step.
A/R is a great guide for your business if you issue invoices. It’s the easiest way to forecast future cash flow and a great barometer for your company’s health. Take a moment and review yours, then let us know if a Grow-Up Consulting Engagement would be helpful for your small business.