Interest cost if business has to take loan to meet working capital needs
Background checks/ collection services
Office supplies like paper and ink sent to customers who owe
Credit card and accounts receivable
When you offer your customers the choice to pay accounts receivable with credit cards, you increase your cost of credit. One of the main functions of accepting credit cards is the ability to collect payments faster.
AR WITH CREDIT CARDS DEFEATS THIS PURPOSE.
How Did We Get Here?
MOST TIMES WE SIMPLY DO WHAT EVERYONE ELSE IS DOING WITHOUT THINKING ABOUT THE BEST APPLICABLE SOLUTION FOR OUR BUSINESS.
Available Options
If you accept credit cards FOR AR, think about adjusting your policies where customers pay before they get the final good or deliverable.
In exchange for credit card fees, you should reduce your chances of accumulating accounts receivable.
BE INNOVATIVE – YOU DON’T HAVE TO DO THINGS LIKE EVERYONE ELSE
ACCOUNTS RECEIVABLE TURNOVER
The turnover ratio computes how many times accounts receivable is turned to cash in a year. The higher the ratio, the shorter the collection period.
Number of days to collect = 365/ accounts receivable turnover ratio
365/4 = 91.25 days
This means it takes an average of 91.25 days to collect.
Next let us compute the cost.
COST OF CREDIT SALES
Every month you keep your accounts receivable there is a cost
Summary
In exchange for credit card fees, you reduce your chances of accumulating accounts receivable. If you are not in the credit business or your credit sales does not increase total revenue in any way, then you are spending way too much on accounts receivable.
