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Managing your accounts receivable

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The way that accounts receivable are managed can have a large effect on a company. Because companies must maintain a cash flow in order to stay in business, they must ensure that their accounts receivable are bringing in the needed cash. However, in order to attract more customers, it is necessary to offer credit. Businesses need to make sure that they find a proper balance between extending credit and maintaining a cash flow. Companies should keep in mind a few things when establishing and managing accounts receivable.

Keep Cash on Hand

Cash is the blood for any business operation. Companies must be sure that they have enough cash on hand to pay employees, buy supplies, pay the rent or mortgage, and make surprise purchases. As companies establish accounts receivable, they should make sure they have enough customers paying upfront to cover their operating expenses. New customers are good for this because they have not established a strong enough relationship with the company to be granted credit. However, some returning customers should be charged upfront in order to ensure that the necessary money is available.

Extend Credit

Extending credit to some customers will increase the amount of accounts receivable operating. It will also give customers more to spend with as long as they are good for the money. However, before credit is extended, a company must establish a credit policy. The policy should be clear and thorough. Customers should know exactly how much is being sold to them on credit and when they must have the entire balance paid off. Performing credit checks is also a good idea, especially with new customers. At the same time, customers who have proven their commitment to the company with consistent on-time payments may be considered for larger amounts of credit or discounts for fast payment. Either way, companies should ensure that money is returning to their accounts receivable.

Enforce the Credit Policy

Each credit policy should be enforceable. Customers should know when exactly they need to pay. If they do not, companies should be ready to send them reminder letters, demanding letters, and then have a policy for what to do if a customer still doesn't pay. Will the company sell the account to a collection agency, or will they try and contact the customer and resolve the problem themselves? Each company must decide the best option for keeping customers paying.

Organizing Accounts Receivable

Besides deciding the best strategy for ensuring that money is continuously being received in accounts receivable, companies should have a method for keeping those accounts organized. Some methods include hiring a private accounting firm, creating an accounts receivable division, or purchasing software that is managed by one employee.

There are obvious positive and negatives to each option. Using a private firm may open the door for miscommunications or a difference in opinion for the management of accounts. Creating an accounts receivable division is a great option for an expanding company, but such a large investment may be out of the picture for a smaller business. Software is an option for smaller companies because it can usually be managed by one employee. Also, software will keep track of overdue payments and sometimes automatically print a report of clients who still owe.

Managing the accounts receivable has many different levels. Companies must ensure that they maintain a sufficient cash flow in order to stay in operation. They may also consider extending credit which may allow customers to purchase more products or attract new customers. Businesses must also decide the best way to keep all of their accounts straight. No matter what, businesses should ensure that their methods are appropriate for their size and expected growth.

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Posted by DF
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