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Options available to businesses owed money

November 14, 2012

Do you have customers who owe you money? The truth is, that money doesn’t always come in. Or worse, by the time it comes in it may be too late. Avoid this pitfall and learn how to help your business earn more with this week’s business tip from SBDC Advisor James Leavelle. 

SAN ANGELO, Texas — Have you ever heard the saying, “as long as someone owes you money, you will never be broke?”

That sounds promising, but businesses close down every day because they are broke and unfortunately, it is because too many people owe them money.

We may ask, “How can they be broke if they are busy and have a lot of people that owe them money?” A business owner that extends credit will learn (hopefully sooner than later) that carrying credit accounts has a cost. Being owed money is not the same as having money in the bank. The business owner cannot pay his or her bills with money that is owed to them.

For this reason, a prudent business owner will run and monitor the Aged Receivables report on a regular basis (monthly at a minimum). What is an Aged Receivables report? It is the report that can be produced from nearly any bookkeeping software that tells you how many and what accounts are less than 30 days old, 31-60 days old, 61-90 days old, and over 90 days. Some reports add an over 120 days column.

Why is knowing this important? The longer that you allow an account receivable go uncollected, the less that account is worth to you. How can that be? The customer owed me $200 when I made the sale and two months later, they still owe me $200.

As I mentioned before, accounts receivable have a cost. The $200 owed to you is $200 you can’t put toward buying more products or paying for overhead. You also have bookkeeping costs of carrying the account, and as you try to collect on the account you spend money. This drives your profit margin down.

At some point, the cost of carrying the account will be more than the account is worth. The value of the Aged Receivables report is that you as a business owner can monitor your outstanding accounts to see how much money is overdue, by how long, and by whom. This allows you to decide how aggressive you need to be in your collection efforts.

For your overdue accounts, there are several options available to you. You, of course, can continue to monitor and attempt to collect. Another option is to hire a collections agency. A third option is called factoring and is basically selling your receivable account to an agency that specialized in factoring. The latter option is a little more involved than it sounds, but it can help keep your accounts receivable from getting too old.

The intent of this article isn’t to suggest that having accounts receivable is bad. Some businesses couldn’t operate if they didn’t have accounts receivable. Such businesses, hopefully, are monitoring their Aged Receivables report and acting upon what they find to keep the accounts from becoming too old.

If you are considering allowing your business to have accounts receivable, or if you are experiencing problems with aging receivables, contact the Small Business Development Center. We can work with you to develop a plan that will help you manage these accounts more effectively.

“Business Tips” was written by James Leavelle, Business Development Specialist of Angelo State University’s Small Business Development Center. Contact him

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