Is Accounts Receivable Draining Your Cash Flow?
By Philip Campbell

Making a sale is very important. But collecting the money
for the sale is even more important. It does not do any
good to sell a product if you don't collect your money.

In fact, you can ruin a business real fast if you neglect
the all-important step of making sure you are collecting the
money for what you sell.

I had the President of a national association of small
business owners tell me a story about one of their members
that really highlights this point.

One of their members started a service business catering to
large health care institutions.

She would provide a trained staff of people to perform
services that the institution would otherwise have to hire
employees to perform. She provided a turnkey service that
would help improve the service levels while at the same time
save the institution money.

After she got her first contract, she began the process of
recruiting, interviewing, hiring, creating an extensive
training program, training the new hires, etc.

This took about three months to complete.

After her team was in place and trained, they began
providing the service. She sent her invoice to the
institution after the first month of services had been
provided.

After a couple months went by she got a really big surprise.

It turns out this institution held invoices from suppliers
for at least 120 days before they paid them. In fact, it was
somewhat of an industry practice.  She was now almost seven
months into her new business and she had not even collected
the first dollar of revenue.

She had been spending money all this time not realizing
there would be this huge delay in actually collecting her
money.
 
Unfortunately, she ran out of cash.

When she started the business she thought she would be able
to get everything going faster and she thought she would be
able to do it a little cheaper.

But the really big surprise came when she realized the hard
way that creating a sale and collecting the cash doesn't
always happen at the same time.

     A Sale is Not a Sale Until the Cash Is Collected

I worked with another business owner who had recently sold
about $18,000 of merchandise to two different commercial
accounts. He had basically hit a home run by winning these
two new commercial accounts.

He was feeling really good about the sales and about finally
breaking into this untapped market.

And his income statement looked really good in the month he
made the sales. In fact, it showed he had the best month in
the store's history.

What he had not realized until now was that these sales were
actually hurting his cash flow.

Not only had he never collected the $18,000, he had already
paid for the inventory he sold them.

To make matters worse, this uncollected sale was happening
at a time of the year when he could least afford to be
without the cash. The sale looked good in the income
statement, but not so good in his cash flow.

     The Key is to Manage Accounts Receivable Closely

He learned a very important lesson about selling to
commercial accounts.

He learned that selling something and collecting the money
are two different things. He created new standards for how
these sales would be handled in the future.

Each invoice for a commercial sale would have a specific due
date on it.

He began talking to his commercial customers about his terms
very early in the selling process. Having this worked into
the selling process early on helped him make sure his
invoice would get processed timely once it was sent to the
company.

He also decided to begin a proactive process for calling to
check the status of an invoice within seven days of sending
it.

He would have his bookkeeper make frequent calls to check
status of any outstanding invoices so he could aggressively
work outstanding invoices before they could become a
problem.

He also planned to make sure he understood the full cash
flow impact of accepting large orders.

He now recognized that it was very important to know that
you have sufficient cash flow to handle the up-front cash
commitment required to take on a big new order from a
customer.

     Make Sure You Get Paid What is Owed You

If you invoice your customers, you have no choice but to
make sure you actually get paid for every dollar you
invoice.

You must make this is one of your highest priorities so
that you get paid every dollar that is due to you.

This is a critical aspect of your business that you can't
afford to ignore.



Philip Campbell is a CPA and the author of the book:
"NEVER RUN OUT OF CASH, The 10 Cash Flow Rules You Can't
Afford to Ignore". Philip has helped hundreds of business
owners take control of their cash flow.  You can learn more
about taking control of your cash flow and eliminating your
cash flow worries at http://www.neverrunoutofcash.com.