When starting and growing a business, it's easy to get caught up in activities such as research, development, sales, customer service, and more. Cash management may be overlooked unless you start to feel it where it hurts. A steady and dependable cash flow keeps the lights on and contributes to more investment in your business. Managing recurring revenue streams or accounts receivable must be made a priority.
Here are 4 important reasons to stay on top of your accounts receivable.
Cash Flow Forecast & Expectations
Do you have what it takes to keep paying yourself and your employees?
Cash management means knowing where cash is coming from and where it's going. This process is easy if your organization accepts payments immediately for the goods or services you offer. If you're accepting monthly payments from your customers, such as rent or other short or long-term payment plans, your accounting department must ensure that these payments are paid with regularity. If a customer simply stops paying, or becomes non-responsive, there should be immediate follow-up to collect those payments.
When these expected payments stop, your business could suffer in a number of ways. Your spending could be more than you're taking in. Organizational overhead such as lease payments, utilities, payroll, taxes, and more will still be due and you may simply not have enough cash to pay them.
Make business decisions with ease
Do you know your income potential, when to hire, what you can afford?
When you're able to better predict your cash flow, your business decisions become a little clearer. Your sales are up. Your pricing is perfect. Your expenses are manageable. This scenario means that you can start planning a future of growth including hiring more employees, investing in other companies, expanding your product line, and more.
Predictable cash flow is helpful for organizations that sell direct to consumers (B2C) as well as those who sell to other businesses (B2B). The B2B sales process is longer, with higher receivables, and the number of customers may be less, however, both types of businesses have to walk a fine line of planning for growth, expansion, and hiring.
Keep up with taxes
Do you know how much you owe in taxes or are you wincing at the thought?
For business owners, tax time can feel like a burden. Your CPA will expect some organization to determine deductions and what you owe. The expectation is that you will be paying taxes on a regular basis so you're not hit with a large tax bill. Are your accounting records streamlined and all your dollars accounted for? Depending on how your taxes are being calculated, accrual or cash basis, your accounts receivable could be taxed at the time of sale or when the cash is received. Managing cash flow and staying organized is helpful in reducing the stress of paying taxes.
Appeal to venture capitalists
Looking for VC's? Solid cash flow and good financial records look good to investors.
If you're considering selling your company or seeking investors, organized books will be attractive. Watch any shows like "Shark Tank" and you'll hear the VC's drill down on entrepreneurs to see how they've been managing their finances. Well managed accounts receivable are also imperative to impress investors. It shows that you believe in what you're selling and understand the value in receiving payments on time and with regularity.
At a minimum, business owners should have their accounting and accounts receivable organized with these few tips:
- Keep business and personal accounting separate.
- Track all income and expenses.
- Schedule time to organize your records regularly.
- Reconcile and review cash flow for inconsistencies.
- Follow up on accounts receivable accounts that are past due.
The longer it takes you to collect on an invoice, the less likely the invoice will be paid.