Blog: Accounts Receivable—Who Is Really the Culprit?
As a startup company starts to grow, they must optimize how to get the most possible cash into the system from the business.
Accounts Receivable are essentially a loan to the customers and someone in the company providing a product or service must be responsible for collections.
Since it’s all about cash, an important aspect of cash availability is the quality of the Accounts Receivable A/R.
Banks say they will loan 80 percent of a company’s A/R, but I have advised companies many times to only count on 50–60 percent, if a loan can be obtained at all.
Why is this discounted so badly? They may discard A/R over 90 days because of the high risk; international sales for which a company has no leverage to collect; government sales usually take too long to pay, and accounts in the A/R that are generally considered poor risks to pay (i.e., client’s credit rating is low). Banks are not investors, and they need to minimize their risks to make money and cover their bad loan deals.
The obvious action is to improve the A/R quality. In my experience, the biggest improvement can come from better timely collections. Companies will blame poor collections on the customers. Many times this was more a perception than fact. The biggest reason for delay in payments is poor paperwork, wherein the invoice to the customer did not match the purchase order from the customer. I was able to help a company collect over $200,000 that was argued over for months by eliminating a $25 service charge that were added for units returned that had no problem. The total added was only $750, but the supplier had not informed the customer this was going to happen, not in the invoice.
The second noncustomer problem was not receiving all the deliverables listed on the purchase order. The worst example I remember was not getting paid for an $110,000 software product for lack of a $5 memory disk. Engineering played it down, but did finally admit that the customer would have to operate without the latest version of the software that they were promised on the purchase order, but was receive by the customer.
There is another noncustomer problem that is in total control of the supplier. This is getting the invoice out the door ASAP. I have seen systems where the process may take days to get a bill out. There are many companies today that allow the supplier to bill instantaneously online when the product is shipped.
It’s fortunate in many cases with and an app or purchase of the product on line that can the supplier essentially can collect the cash upfront.
During my career, I got involved in turnarounds—companies bleeding cash and negative profit that were a step away from the spiral to oblivion. You can bet a company in deep trouble probably wasn’t watching collections. The first priority for me was to understand the A/R to see how I could squeeze it for cash as soon as possible. I even got to know accounts payable clerks in big companies to understand why they were delinquent in their payments. These strategies helped, and they provided the life blood to keep the company moving forward.