Wednesday, July 20, 2011
Lesson #67: Managing Accounts Payable & Accounts Receivable
The more diligent you are at managing your working capital, specifically your accounts payable and accounts receivable, the easier it is to manage the ebbs and flows of your cash flow.
Accounts payable are current liabilities less than one year old. And, more practicably, they represent your normal monthly operating expenses which get invoiced to you monthly. One way to stretch your cash resources as a startup, is to stretch out the timing on when you actually pay your monthly bills. Most bills get invoiced with 30-day due dates. But, stretching those payments to 45-60 days can give you an extra 15-30 days of time to allow cash from revenues or other sources (e.g., financing) to materialize before having to go cash out of pocket.
That said, the longer you stretch out the timing on paying your bills, the higher odds you piss off your vendors, where they may want to drop you or implement prepayment terms to continue the relationship. In addition, late payments by you also increase the odds such late payments get reported to business services like Dun & Bradstreet (D&B) or the Better Business Bureau (BBB). So, you don't want to use any long term techniques that would impact your public facing business credit ratings or corporate image. So, only use these techniques when you have no other choice.
Accounts receivable are current assets less than one year old. And, more practicably, they represent your normal monthly revenues which you invoice monthly. So, the keys here are: (i) make sure you are invoicing your customers on the first date of each month, to get the collections clock started sooner than later; and (ii) make sure you have a process each month to follow up with late paying customers, to collect your cash sooner than later (e.g., monthly aging reports, controller who tracks down late payments). The longer you take to invoice clients and the longer you take to collect late paying receivables, the more cash strains you are putting on your business.
And, manage your customers accordingly. If you find yourself with consistently late paying customers, change the terms of doing business with them (e.g., to prepay only). Or, an effective tactic is to shut off your services, until such late paying customer becomes current with paying your bills. When all else fails, after months of delays in collecting payments, you may have no choice but to terminate the relationship with that customer, report them to D&B and the BBB and turn over your materially past-due receivable to a collection agency. So, keep a budget for bad debts expense based on the credit of your customers, and what percent of your receivables they represent.
Don't get so bogged down with the running of your startup, that you forget to manage the timing of bills you need to pay and the timing of receivables you need to collect. It can make a material difference to your cash flow, and can more easily get you through the tough times.
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