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Even as they explore ways to bounce back from the financial setbacks created by the pandemic, there are some businesses utilizing this crisis as an opportunity to review goals, assess strengths, and ensure sustainability and future growth. Forward-thinking businesses look for ways not just to survive, but to increase their financial capabilities.
For startups and small businesses, the stress of financial constraints can sidetrack the best plans. An April 2020 report by Harvard Business Review says that a large number of businesses were forced to close down and lay off staff. Small businesses, and those with fewer than 500 employees, account for 48% of American jobs and 43.5% of GDP. They are also the ones facing a significant financial challenge: the lack of available cash.
Staying Afloat – Accessing funds in accounts receivable
Accounts receivable (AR) management needs close examination. For most small businesses, if AR cash is released, an increase of cash, through this reserve, is possible. Many small businesses and startups do not receive payments until after delivery of the product or services, causing AR to inflate. Some businesses receive partial payment in the form of an advance, but the norm is for customers to withhold the majority until services are delivered. This leads to a delay in payment, causing the business to lose interest and miss potential opportunities because of a lack of adequate capital. Many startups and small businesses survive from one payment to the next, and so it is imperative that accounts receivable aging be decreased so that funds can be released.
Rigorous and consistent AR management
Consistency is key. Consistent and diligent accounts receivables management remains the best way to ensure customer payments. Here are three ways in which businesses can help clients pay unpaid invoices and therefore decrease accounts receivable delays.
Are the clients unable to pay for services rendered because they themselves are similarly hindered? A casual conversation should reveal the reasons payments are not made. If there are genuine concerns such as bankruptcy, or an issue with their own invoices and accounts receivable, your business can offer assistance such as extensions on payment due dates or smaller payment installments.
Businesses can also help their clients recover overdue money by partnering with professionals, much in the manner they themselves would access professional recovery help or professional collection help.
Rolling back services to non-paying customers can help trigger payments. Incentives can then be offered for prompt payment or payment schedules can be created. Installment payments encourage customers to begin the process of making payments.
This approach may require a detailed assessment. Some customers may choose to cancel transactions with the business altogether. To ensure customers do not cancel transactions completely, use this approach with discretion. Assess each individual customer to determine what is causing the payment delay, and if the reason cannot be resolved with assistance, explore a reduction in the overall business engagement. Remember, the aim is to recover money, not to lose customers who may be facing hard times.
This approach for AR management requires going back to basics. You can implement these techniques even at the collection stage. Non-paying customers can be assessed for business soundness; communication with them can then be initiated to begin the process of collecting. This can involve calculating the overdue amount and working it into a repayment plan. You can then share the plan with your customer to initiate the process of payment. It may be necessary to start with small payments.
This process may require recording financial transactions, diligently tracking unpaid invoices to spot payment default patterns, and billing services and products. As you plan, it is important to rule out lack of initiative by the business. Ideally, professional expertise can help prepare a repayment schedule in alignment with data collection, to analyze and understand transaction patterns and whether the customer has a tendency to default on payments. Diligent recording of financial transactions, while studying the pattern of financial disbursements and client payments, can also reveal the likelihood of future missed payments.
Navigating the crisis
Crisis navigation requires careful steps to ensure you make the best of the situation. Ideally, the strategy adopted to mitigate the collection crisis can be used regularly to avoid the situation from happening again. For business owners, it is critical to identify problem areas and timing. Ensuring time is not wasted is critical in preventing account aging and further loss of money. It is vital to look at the big picture and pursue collections in a prudent manner, without losing returning and new business.
Professional business accounting services can be valuable in ensuring adherence to bookkeeping and accounting basics, eventually helping the AR management and collection process.
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