23 May MONEY IN MONEY OUT
You have the good, the bad and the ugly with money! When it comes to your Accounts Payable and Accounts Receivables you never want them to be anything but good! And you really never want to them to be the bad or the ugly!!
How does the old saying go….trust me…that is exactly what you’re doing when you extend credit to others, otherwise known as Accounts Receivables. On the other hand you’re saying …trust me… when you receive a bill in the mail… that you will pay the creditor that extended credit to you, otherwise known as Accounts Payable.
Accounts receivables are something you are owed – listed as an asset in your chart of accounts. Accounts payable are something that you owe – listed as a liability in your chart of accounts.
Accounts receivables are good when people are paying you on time. They are bad when they are slightly overdue. They are ugly when they are over 90 days old – when you have no idea if you are ever going to receive payment let alone payment in full. Many companies collection policy is to write off all debt extending 90-120 days, knowing the likelihood of receiving payment at that point is little to none.
Accounts receivable is very simple – it is money owed to your business by individuals or businesses that you have extended credit to. If you do not receive payment in full at the time services are performed or products are purchased – you are extending that customer credit. Accounts receivables are a living aspect of your business that needs to be managed and controlled.
Accounts receivables can get to the point of having a life of their own within your business. If you do not monitor your accounts receivables on a regular basis, if it is one of those things that you will get around to, it’s already too late.
There is a diminishing return on accounts as they age. If an invoice is outstanding for over 90 days the value of each dollar due can drop from $1.00 to $.80. From $1.00 to $.80 – think about all the time and effort that goes into setting your retail pricing structure, this can have a huge impact on your profitability in a very short amount of time…90 days.
Prior to extending credit to your customers you also need to verify that your business can sustain itself while waiting for payment. We have seen small to mid-size business land commercial accounts that overall look amazing but in the end have actually bankrupt businesses. Large corporations’ payment policies are critical; they may not pay for 90 days and even then only pay a portion of the total amount due.
If you are extending credit to your customers, I cannot stress enough to document and monitor the process, do not let it be a business loss but rather a benefit your customers respect.
Accounts payable are good when you receive an incentive to pay within a certain time-frame, utilizing it to save money. They are bad when you are slightly overdue. They are ugly when you are over 90 days overdue.
Accounts payable is when others extend credit to your business. If you do not pay for a service at the time it is performed or a product at the time of purchase – you have received credit.
Many businesses extend incentives to their customers. Such as 2% credit if the bill is paid within 15 days or 1% credit if the bill is paid in 30 days. Obviously amounts and offers vary from vendor to vendor. It is advantageous to your business to take full advantage of these offers. Even if it is 1% off, that is money in your pocket verses theirs.
Having processes and procedures in place for your accounts payable provides clear instructions on when and what bills are to be paid and in what time frame. As stated above with accounts receivables document and monitor the process, do not let your accounts payable get out of control. You want other businesses to continue to grant you credit while providing you with discounts.
Both your accounts receivables and accounts payable can be the good if like everything else in your business you are aware, you have processes and procedures in place and they are being monitored. Extending credit to customers can definitely its advantages for business growth and development. Receiving credit from your vendors also has its advantages for business growth and development.
The good, the bad and the ugly – money in money out – make sure your accounts receivables and accounts payable work for you and your business. Applied Management Group can work with you to provide guidance on the proper allocation of your accounts receivables and accounts payable in your accounting software program. While also creating your processes and procedures providing the good verses the bad or the ugly.