Your Accounts Receivable is NOT Revenue
At first glance, a high dollar amount in Accounts Receivable seems promising. After all, it’s your asset and it’s growing, and any growing asset is good, right?
Not always. Having a high A/R may be a warning sign of bad things to come if you’re not careful.
Your aging A/R figure represents the amount of dollars your business has effectively loaned to your clients. Lurking inside that dollar amount are all of the goods and services rendered by your business for free. Until you’ve been paid, your clients are essentially treating your business like a bank. Worse still, your “bank” isn’t even earning any interest on that loan!
Accounts Receivable is an asset for your business. It’s a resource that may benefit you over a period of time, but it hasn’t yet.
Revenue is an increase in resources to your company. Revenue is your cash flow, which is the lifeblood to every business.
The risk of aging A/R
It’s not that a business owner ever wants to be lax with collections. The problem with aging A/R is that it can start to grow exponentially: 26% of unpaid invoices that are 3 months old will default, 70% at 6 months will default, and 90% of 12-month old invoices will never get paid. That means the longer you let a client go without paying you, the more likely it is that your business will never see that revenue, and the higher your accounts receivable gets.
- Maybe invoices aren’t being sent out in a timely enough manner. It’s a lot easier for a client to let a bill go if they don’t receive it until 30 days after services rendered.
- To err is human. Invoices that are reconciled when they shouldn’t be won’t get followed up on.
- For those invoices that do need follow-ups, being diligent about payment reminders is a must. Your clients are happy to have the interest-free loan! If someone isn’t reminding them, they may take advantage. Which brings us to…
- Missing policies and process. When the owner of a business is also the sole collections agent, things slip through the cracks. With collections policies in place for progressively aging A/R, you’re more likely to get paid.
There are ways to get around these accounting faux pas – but most of them either take time away from growing your business, or add an extra expense. At the end of the day though, you’ll want to do something, because as businesses grow, aging A/R becomes increasingly difficult to stay on top of without good systems in place.
You could go about it the hard way, and manually follow up on every unpaid invoice, fill your afternoons with difficult phone calls to your clients and send a few too many E-mails with “URGENT” in the subject line. You can hire a full or part-time accountant, or spend your weekends balancing your books and your evenings in collections.
Or, you could go about it the smart way. By simply automating a billing system for your business, you can reduce your aging A/R and start getting paid on time, every time.
Our clients reduce their Aging A/R by up to 97% after utilizing ConnectBooster.
ConnectBooster offers a suite of tools that help increase cash flow for your business. Easily set up all of your clients on Autopay, automatically generate variable invoices every month, send dunning notifications for late payments based on customized triggers, and leverage a professional Payment Portal for your clients.
You can increase your A/R all day, but you’ll never be able to grow your business without growing your revenue. ConnectBooster automates your billing so you always have revenue to invest back into the success and health of your business.