The current challenging economic conditions make effectively managing cash flow and collections more important than ever for small business owners. Business owners usually have a good command over the expense portion of their cash flow. It’s easy to track with basic software. Most small business owners, however, aren’t as comfortable managing accounts receivables and knowing when to turn them over for collection.
Periodically review your receivables and analyze whether they should be turned over to a collection agency or attorney for collection. You can do this with two relatively simple calculations: Days in accounts receivable (A/R) Net collections percentage
Days in A/R measures the rate of A/R turnover. It represents the number of days of A/R outstanding based on the business’s average daily revenue. To calculate days in A/R, take your total A/R divided by the business’s average daily revenue. (For the average daily revenue, divide total revenue for the last three months by 90.3 days, representing three months.) Be concerned when this number is in excess of 30-45 days. The second calculation is a measure of a business’s effectiveness in collecting revenue. This calculation allows you to determine how much revenue is lost due to factors such as uncollectible bad debt, inappropriate adjustments, payment posting errors or internal theft.
To calculate the net collections percentage, divide receipted money (less refunds) by invoices (less approved write-offs) for the selected time frame. Base your calculation on the day of the invoice or date of service. That way, you avoid comparing charges generated in the current month with payments and adjustments taken on claims from many prior months. For most industries, a total net collections percentage of about 95% is critical for long-term success. If your business is struggling with these ratios, seriously consider involving a collection agency, or attorney, to assist with turning your receivables into cash and improving your bottom-line. Collecting receivables is highly regulated by the federal government under both the Fair Debt Collections Act (“FDCPA”) and the Bankruptcy Abuse Protection and Consumer Protection Act (“BAPCA”). It’s vitally important that you receive input from experienced and competent legal counsel.
To help you navigate these laws, Strauss & Troy can assist you with both the analysis of the A/R ratios and applicable federal laws. We can also assist your business with putting a proper collections procedure in place to make it easier to receive and collect judgments and avoid running afoul of the FDCPA and BAPCA.
Strauss & Troy Attorney Jack Gatlin regularly practices in the areas of small business law, civil litigation, collections, commercial transactions, family business planning and probate. Contact Jack at firstname.lastname@example.org or 513-768-9710.