MYTH VS TRUTH: Is Receivables an Asset?

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Past-dueThe myth most business owners believe: Just about all business owners consider it an asset. Why not? Their bankers and their CPAs tell them it is.

Why this myth causes a problem: In a word – you can’t spend receivables! (Yes, I know you can borrow against it. But that is getting very hard to do.) In truth – trade receivables is really potential future cash in the bank.

The truth successful business owners learn the hard way! The best sale is a cash sale. Better yet, the best sale is a sale where you get prepaid all or a part of it in advance. You have to pay your staff and your vendors. And they want CASH!

But business owners also know they will sell more if they can offer payment terms. In many industries this is what the customer has come to expect. So what do you do if you must sell on terms?

Lesson learned: The following are some of the ways that smart business owners control their receivables:

  1. Don’t let it become a receivable in the first place! Give a discount for prepayment. On large jobs, especially from new customers, take a substantial down payment.
  2. Know your customers. Do a credit check if they are new. Or trust them and start them off with a small credit line, and let them “earn” their way to a larger credit line. This is what I did when I was the Controller for Magnolia Coca-Cola. We often provided credit for a startup where our competitors wouldn’t. But we paid particular attention to these and called them quickly if they were late on a payment. As these customers grew, they were very loyal Coke customers because we trusted them when no one else would.
  3. Be upfront with your customers about your payment expectations. Don’t be afraid to discuss payment with them.
  4. When possible, don’t deliver the product to the client until the bill is paid. We implemented this on tax returns a few years back, and it greatly reduced our receivables.
  5. Don’t hesitate to collect. The longer a balance is outstanding, the higher the chance of it becoming non-collectable. Assign smaller ones to your staff, but the owners and the sales staff should be involved in the larger balances due.
  6. When a balance becomes seriously past due and there is doubt about collecting it, you should call the customer and offer a deep discount if they pay by a certain date.
  7. As a last resort, have an attorney send a collection letter. I am not really a fan of suing for receivables. This often leads to a countersuit. Plus, your time is better spent getting a new  paying customer. But a collection letter from an attorney is often enough to shake loose a payment.

Thank you for your continued support and let’s make this year our most profitable year ever!