Monday, December 22, 2014

Managing your accounts receivables

I've met a lot of small business owners and entrepreneurs in India in my four years doing business here. If I were to highlight the one aspect that plagues most businesses is accounts receivables.

Accounts receivables is critical to cash flow, and most B2B start-ups and small business suffer from a low accounts receivables turnover (ratio of annual sales to average receivables). If you're selling on credit then it is imperative to maintain a strong collections process to maintain a healthy cash flow. A few lessons learnt the hard way on account of low receivable turnover;

  • Sales entered in books immediately attract sales tax (payable monthly) and income tax (payable quarterly). Ensure you track your cash flow to account for these dues.
  • Vendors (especially foreign supplier) have strict payment terms, so this can get you into a financial bind as you will be in a pressure to clear vendor dues regardless of whether you collect from your clients. Negotiating favourable terms with vendors reduces your risk when collections take a hit.
  • Don't overlook the deal terms in a rush to close a deal. This not only impacts your receivable turnover, but places added pressure and risk on you as a company as the customer now has the upper hand. Be smart in your negotiations, especially on terms. Make sure you collect an advance.
  • Lastly and most important have a disciplined collections process from day one you start your business. Use your CRM and invoicing system for email follow-ups. Review your receivables and follow-up with customers on a regular basis. If required have legal notices sent to customers. Most companies would immediately respond to that. There are also favourable laws for registered MSMEs (Micro, Medium and Small Enterprise), which you can leverage during your negotiations.

(C) glasber