It’s tough to say what percentage of revenue the average small business carries in outstanding receivables and bad debts. But it’s clear that throughout the recession, countless business owners faced greater difficulties collecting outstanding invoices. And for many, it meant the difference between surviving another year and closing their doors for good.
All smart business plans account for downturns and cash flow fluctuations. But there is nothing more important than managing cash flow to ensure your business can pay vendors and employees, and sustain itself through tough times. When a small business carries excessive accounts receivable, the bottom line can suffer immensely.
And when a sale turns into a bad debt, your investment of time and money becomes a loss. Every customer sale has associated costs: start-up expenses, costs related to marketing efforts, sales expenses, inventory, production, labor and more. Collecting bad debts allows you to recover some of your investment – and is simply sound business administration.
Fortunately, there are alternatives for business owners who face a high level of accounts receivable and bad debts, including accounts receivable financers and collection agencies.
Accounts Receivable Financers
Business owners can enjoy a stronger cash flow and greater financial leverage by working with accounts receivable financers, also known as “factors.” Factoring firms purchase a business’s accounts receivable at a discount, in exchange for cash that the business owner can immediately put to use for expenses or operations. The factor typically pays about 70 – 85% of the value of the debt, and then assumes the risk of collecting the receivables. The balance of the value of the accounts receivable is paid to the seller upon collection, minus the factor’s commission and other fees.
If your cash flow is generally healthy, but you have long-running outstanding invoices, you may decide to write them off. But there is another option that can strengthen your bottom line: collection agencies.
Call in the Collections Experts
Many small businesses have outstanding accounts receivable in the 90 – 120 day range. Rather than giving up on these invoices and writing them off as bad debt, why not consider having a collection agency take care of it? Recovery rates vary, but any percentage of repayment can help keep your cash flow positive. Collections agencies charge a percentage of what they collect, which may vary from 18 – 33% or higher, depending on the amount collected. Here are some tips to keep in mind when deciding whether to send an account to collections:
Selling your business’s accounts receivable can be very effective in quickly strengthening cash flow and improving revenue. Rather than writing them off as a bad debt, you realize a gain that goes straight to the bottom line.
In addition to accounts receivables, a business’s debts also affect the cash flow equation. If you’re experiencing a crunch, you may not be able to pay every vendor invoice by the due date. That’s when it’s time to try renegotiation.
Renegotiate To Buy Yourself Time and Improve the Bottom Line
If you need to pay your suppliers and protect your cash flow, talk to your vendors before borrowing money to pay invoices. Many of your long-time vendors and suppliers will be flexible in the short term, especially if you are a good customer with a strong payment history. Here’s how to approach this negotiation:
If you’re a good customer, who treats your vendors like the important business partners they are, you may be surprised at how understanding and flexible they can be.
Use Outstanding Receivables to Keep Cash Flowing
The business environment is tough, but better times are surely ahead – if you can keep your cash flow healthy and your business sustainable. So take a look at your outstanding accounts receivable and bad debts. Leveraging these accounts for instant cash may be one of the best business decisions you make, and really pay off in the long run.