At Tom Vignali CPA, Inc., we are dedicated to dealing with all aspects of the financial viability of our clients. This includes reviewing and advising on everything that impacts their financial performance. In a previous article, A/R (Accounts Receivable): An Asset or Potential Liability, we outlined some issues regarding A/R (Accounts Receivable). In this article, we will discuss potential solutions to one of the problems that was illustrated: A/R accounts that are beyond terms.
In a perfect world, it would be great if everything that was sold was paid for immediately and there was no need to extend credit terms or post these sales to A/R and wait for the eventual payment. This is a possible strategy, which we will discuss, but in cases where you can’t obtain immediate payment, there are some other solutions to encourage prompt and quicker payments. After all, you had to spend money on products and/or services to generate these sales, and the quicker you get your money, the sooner you will have the cash to pay for these products and/or services.
So, let’s make some basic assumptions. Let’s assume:
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- That you need to offer terms in order to remain competitive
- Your terms are Net 30
- Some customers pay immediately, and you want to incentivize others to do so
Provide incentive for immediate payment
So, for the customers that pay immediately, no problem. You have all of your money up front and there is no receivable. Great! But in order to incentivize other customers to do the same, you could offer a 2 percent discount for immediate payment. This could possibly get you more money faster if the incentive works and more customers decide to take advantage of the 2 percent discount. But, it would also transfer to your existing customers who are already paying immediately without the 2 percent discount, and that discount would now apply to their purchases as well.
You will need to calculate:
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- If the 2% discount is affordable in your pricing structure
- If the 2% discount offered to existing immediately-paying customers is affordable
- If the 2% discount is adequate enough to attract more immediately-paying customers
Benefits and cost savings:
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- You will have your money immediately
- No need to post sales to A/R
- Reduced internal accounting processing work
- No need to wait 30+ days for your money
- Reduced risk regarding A/R (reduces delinquencies, bad debt, etc.)
- No carrying costs to fund A/R
Extend discount to payments made Net 15
Additional consideration: If you take payments via credit card, you will have to calculate if the immediate payments via credit cards will increase your fees, and if these can be reasonably included in your pricing structure. But, it is assumed that these fees have already been calculated if you take credit card payments. You should be aware of any programs which increase the use of credit card payment fees.
You could use the above example, but apply the 2 percent discount to payments made Net 15. This could potentially reduce waiting for 30+ days for some of your money. But, to be equitable, you would still most likely have to offer this to the customers paying immediately because they might move from paying immediately to paying Net 15 in order to get the discount. This would be a dis-incentive to paying immediately.
To offset this problem, it is possible to make adjustments to the discounts to:
Immediate payment: 4% discount
Net 15 payment: 2% discount
Once again, you will have to calculate what the impacts would be to your pricing structure and profitability. If properly calculated, it is possible to increase immediate payments, reduce A/R, shorten the collection time on A/R AND possibly increase sales due to the discount incentives.
These are just a few options to be considered to increase your flow of cash, shorten payment times, and possibly increase business volume. Another option might be volume discounts, but again, this all needs to be calculated out to maintain profitability.
Monitor and take immediate action on delinquent payments
Regardless of what you do, you should be constantly monitoring the status and aging of your A/R. The moment an account exceeds your 30 day terms, you should be reaching out to that customer. Additionally, discounts offered on Net 15 day payments that become delinquent should be rescinded. Customers shouldn’t be allowed to take a discount on reduced payment terms, and then pay late. This might sound harsh, but look at the standards that your vendors impose upon you. If you are required to pay on time, or meet certain terms to obtain discounts, it’s not improper for you to use these same practices with your customers.
As for seriously delinquent customers, say customers with A/R accounts that are 60+ days, each one of these accounts must be dealt with individually. One thing is certain: a continued extension of credit will not address the problem or resolve it. There are a various solutions and alternatives available, but we would prefer to discuss them with you on a professional basis. If these are issues you are experiencing, please contact us directly at Tom Vignali CPA, Inc., and we would be more than willing to assist you.
Is charging interest on an overdue A/R effective?
We would be remiss if we didn’t mention that some businesses charge interest on A/R accounts that are overdue. It is our experience that many times these fees/charges are never paid or often times dismissed in order to maintain the business relationship. Additionally, they rarely if ever cover the costs of dealing with delinquent receivables and never make up for the resulting loss of available cash. As mentioned in the previous article, A/R (Accounts Receivable): An Asset or Potential Liability, once a delinquent receivable is discounted from Asset consideration, the financial implications to the business are potentially extensive and expensive.
We hope we have pointed out a few of the potential solutions to the A/R collections issue. Frankly, the solutions are as endless as you are creative. But one thing remains constant: the quicker you get your money, the more agile your business will be. Receivables might be nice, but cash is always better!
If you would like to further discuss this issue or any other accounting issues, don’t hesitate to contact us at Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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