Do you know what your AR is costing you?
Why accounts receivable?
Downside of Accounts Receivable
Opportunity cost of cash
Additional staff required to maintain accounts
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.
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.
Accounts Receivable turnover example
Accounts Receivable Turnover = Sales/ Accounts Receivable
Sales = $1,000,000
Accounts receivable = $250,000
AR turnover = $1,000,000/ $250,000 = 4 times
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