Thriving businesses have solid accounting practices. It keeps them ready for sudden shocks and prevents dry cash flow. However, small businesses often don’t follow this principle and usually have long overdue invoices as a glaring sign.
If your business is in the same situation? Do you take too long to collect receivables? Well, this article will help you come up with a solid answer and figure out if you have delinquent debt that needs assistance from debt recovery services in Houston.
Come Up with an Average Debt Collection Period
The average collection period is the window within which your clients usually pay their dues. This period can be expressed as a ratio and also bring you insights into your financial health. When one or multiple clients exceed that window by a small or a great margin, it should make you rethink:
- Who you conduct business with.
- Your credit policies along with payment terms
- About reaching out to debt collectors for debt recovery service.
Calculating Your Average Debt Collection Period
There are several ways to calculate average accounts receivables. Here’s the simplest version:
- (Average accounts receivables / Net Credit Sales) multiplied by the number of days (usually a year or 365 days)
For instance, if your business recorded net sales of around $10 million with average accounts receivables of $500,000 for the same period, your average collection period would be:
- (500,000/10,000,000) X 365 = 18.25.
That’s a thriving fictional business since the statutory payment for B2Bs is usually a month. Unfortunately, half of such B2Bs always face liquidity issues and end up reaching out to commercial debt recovery agencies at the last moment for debt recovery service.
The Ideal Average Debt Collection Period
The lower the average collection period is, the better. However, the reality is often skewed and comes in various shades. Similar to retail, some B2B clients would pay as quickly as possible while others would delay payments significantly.
Moreover, the average collection differs drastically across industries. For instance, real estate companies hire laborers and contractors for projects that aren’t generating any revenue at the moment. They can only bring in money after the construction. That’s why contractors in this industry have a very narrow window for collecting receivables.
On the other hand, government contractors usually have a large window since they deal in bulk projects and are guaranteed to get paid. Inquire about the average collection period in your industry and compare it with yours. If it’s lower, you are doing better than most of your peers. Otherwise, you may need the help of debt collection services to quicken things.
Consequences of Higher Collection Period and Overdue Receivables
Your business is on a crutch when you have a longer-than-average collection period.
- First of all, you’ll have difficulty in growing your business. With liquidity problems, you won’t be able to pay your suppliers or workers on time, and expanding is going to be a pipe dream.
- Moreover, when you are into cash flow problems, you’ll need to borrow more money and pay interest on that. This is a double wound to your business’ success since you aren’t just earning interest on money that could be kept at the bank but paying interest for borrowing more money.
- Banks scrutinize your business thoroughly when you apply for a new credit line or a loan for a new venture. Unfortunately, a higher-than-average collection period sends all kinds of wrong signals and may lower your creditworthiness or slap you with a higher interest rate.
If you are thinking about growing your business, focus on the debt recovery process and accelerate it with professionals to bring down the average collection period.
Tips to Improve Debt Collection Period and Get Paid for Your Invoices:
- Stick and carrot – Offer incentives and penalties to your clients to improve your collection period. For instance, offer them a coupon or a discount for making early payments and impose fines for late payments.
- Review credit worthiness of clients – List down all the clients that take too long to pay up and categorize them according to the frequency of late payments. Some may have paid late just a couple of times and need better communication to fix the issue. On the other hand, you need to rethink your business relationship with clients who have a regular habit of missing payments.
- Get a debt recovery agency – You can also employ debt recovery agencies to streamline receivables when they are overdue. Partner with an agency and outsource the task to them when your accounts team runs into payment problems.
Focus on the time your customers take to pay you may seem trivial compared to landing a new client or signing a new contract for future growth. However, when cash flow is restricted all those dreams and excitement need to take the back seat. Don’t put yourself in that situation and act now.
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