by: Raymond Chang, CPA
Managing cash flows is one of the most important components of running a successful business. Focusing on sales and profit growth is important, but cash is king. You need cash to pay expenses and to keep the business running. Bad customers or slow payers pose a challenge not only to your cash flows, but also your resources. Which is why managing your trade receivables is crucial.
Below are some effective techniques to help manage trade receivables:
Always work with an electronic version of your Trade Receivable report
This is probably the most effective way to sort, group or filter the data in a summarized manner. Especially if your customer accounts are scattered across thousands of pages in the receivable report. Ideally the electronic download should also maintain the receivable aging as well.
Review your positive accounts separately from your negative accounts
Depending on the accounting software, customer advances (or credits) may not be auto-segregated from customer balances. Just because you see a small Trade Receivables on your financial statement, the offsetting effect of advances could mislead you in your cash flow management. The offsetting effect may also mislead your aging analysis.
Don’t procrastinate on your small accounts and use your aging
Large accounts are important, but money can be lost in small accounts too. Small accounts have a tendency to accumulate in numbers, which collectively could be significant. This is why it is important to remove the offsetting effect of negative accounts in your review. In doing so, the aging will more accurately highlight the older accounts. Also, everyone defines “small” differently, but even a threshold of $100 can have an impact if you have enough of them and are not paying attention to them. A common practice is to look at your customer account balances in the “Over 90 Days” category. With the help of a spreadsheet program, such as Excel, the Over 90 Days accounts can easily highlight where your resources should be devoted. But the question you should be asking here is whether or not these are truly collectible and worth going after. If not, then besides taking a hit, you should also find out what happened to minimize the chance for repeat.
Remember, it’s not your money… yet
Negative customer accounts could represent deposits, credits or overpayments. Meaning, their money is sitting in your bank account. Except for deposits, customer credits and overpayments have a tendency to linger and are individually small in amount. Over time, they can accumulate to hundreds or even thousands of accounts and in aggregate, could be significant. That’s when issues arise. A thorough review of these negative accounts should be done to identify those resulting from billing errors, which should be appropriately documented and corrected. If, however, the resulting negative accounts are unused customer credits or overpayments or even old deposits, your company should have policies and procedures to properly document how the credits are resolved taking into consideration Escheatment Laws in the states you operate. Noncompliance with State Escheatment Laws could result in an unfavorable impact to your cash flows and your business. And possibly a state unclaimed property audit going back in excess of 10 years.
If you’d like more information about “Analyzing Trade Receivables” as it relates to your business, please contact Raymond Chang at firstname.lastname@example.org.