Accounts Receivable: Importance of Cash Flow Management

Everyone knows the saying “it takes money to make money.” No truer words have been spoken. A business needs money in order to purchase materials for resale, pay its employees, and to cover all of the other expenses. The revenues collected from your customers are needed to pay the expenses and turn a profit.

Cash flow vital to a company's success If your customers are not paying timely, or not paying at all, your business will soon be without the cash flow it needs to pay its own expenses. Every company needs to be diligent about reviewing its aging accounts receivable and taking steps to maximize their collectability. It may not appear on your ledger as a “hard” expense, but there is an expense – as well as being an unnecessary risk – to carrying too many aged accounts receivable.

The cost is most often seen as the amount of interest you pay, or discounts you cannot benefit from, to cover your expenses while waiting to be paid. You are also losing interest you could be earning on the money while in your bank and not your customers. Also, as time goes by the likelihood of collecting decreases.

In this and upcoming posts I will discuss some specifics that should considered as part of your overall account receivable management strategy. and how together your business can maintain a positive cash flow. The first thing needed is a strategy to follow.

Maintain and Follow a Written Collection Policy

Every business, large and small, needs to have policies and practices in place setting forth how its accounts receivable are managed. It is best that these policies be written. Written policies will more likely be followed by the staff. Written policies will also insure that the accounts are all handled in a consistent manner. Some of the topics that should be address are:

  • Periodic review of the accounts receivable aging;
  • Periodic review of customers payment frequency;
  • Discount eligibility for customers; and
  • Delinquent account collection practices.

These are just a few items to be considered, but far from being a complete list. Depending on your industry, or even the organization structure, there may be additional topics to address.

Attorney Phil A. Taylor has been representing creditors in their efforts to collect delinquent accounts receivable, as well as counseling them on how be proactive when possible to improve collectability of their accounts. The Taylor Law Office offers an initial 30 minute consultation at no charge or obligation to discuss how your business can benefit from being a client.