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Reducing the risk of lost revenue.

Manufacturing and shipping a steady stream of products might give your business a prosperous appearance, but if the payments are not coming in then that appearance will quickly fade.

Neglecting your accounts receivable, money owed to your business by customers, can be the most expensive management mistake you will ever make.

If you let customers owe money for too long because your invoicing system is too slow or your collections department has all the bite of a toothless dog, then capital is tied up needlessly.

There are two ways to reduce the risk of losses resulting from problems in the accounts receivable department. The first is to age your accounts.

At the end of each fiscal month group all your receivables in either current, 30-days, 60-days or 90-days to identify problem accounts.

It is generally accepted that only about half of the accounts which are more than 90-days overdue are ever collected.

Monitoring receivables also offers long-term benefits for your company.

Regular reviews can help you determine whether there is an increase or a decrease in outstanding accounts.

If an increase occurs, then your business's credit terms or collection policies might need to be reviewed.

Once your credit and collection system is under control, the level of outstanding accounts should directly reflect your weekly or monthly sales volumes.

This will also allow you to take the second step to control your receivables - determining the average age of your receivables.

To do this, determine the total dollar value of your accounts receivable and the average daily amount of your daily sales on credit. By dividing the total dollars by the daily average credit sales, you have determined the average number of days it takes customers to pay their bills.

Before you opt to take a customer to collection, you must first determine whether the customer cannot or will not pay the bill.

In the first case, the customer could still turn out to be valuable in the future, and taking him to collection could jeopardize that.

In the second instance, it is best to get the customer off your books as soon as possible.

There are a number of red flags which can identify potential bad-debt clients. The following questions can help you reduce losses:

* Has your customer made a sudden, unexpected large order?

* Does the client refuse to take advantage of any discounts for prompt payments?

* Is the client frequently late in making payments?

* Has the customer sent you an NSF cheque without notifying you, a cheque with an error, or a post-dated cheque without first getting your permission?

* Has the customer asked to return merchandise for full credit?

* Has your customer changed banks since he filed his original credit application with your business?

* Is the customer's inventory level high compared to his volume of business?

* Is the customer ignoring your attempts to contact him?

If you discover any of these instances, then you might want to initiate a credit check and ask your bank to make an inquiry with your customer's bank. Depending on what that uncovers, it could be time to begin collection procedures.
COPYRIGHT 1992 Laurentian Business Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Supplement: Small Business Survival Strategies
Publication:Northern Ontario Business
Date:Apr 1, 1992
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