How to Eliminate an Inflated Accounts Receivable

With tens of millions of businesses in the US alone, there is a staggering amount of buying and selling happening between those businesses and the customers. Frequently, that buying and selling happens between the businesses themselves. A great deal of it is done on credit.

That means that many businesses end up cash-starved because of inflated accounts receivable.

Of course, with so many people launching online businesses or startups without a business degree, it’s entirely possible you don’t know the terminology. So, let’s do a quick recap on accounts receivable before launching into methods to reduce it.

What Is Accounts Receivable?

A basic accounts receivable definition is simply money that your customers owe you for products sold or services rendered. In practical terms, this typically means outstanding invoices. Accounts receivable isn’t the same thing as overdue payments, it’s just money owed.

If you’re wondering about accounts payable vs accounts receivable, accounts payable is money that you owe for products purchased or services received.

Now let’s look at ways to reduce accounts receivable.

Reduce Accounts Receivable Days

When you issue an invoice, you may give your customers 30, 60, or even 90 days to pay, depending on your business. While this encourages customers to buy, it can also leave your financing hanging when your bills come due. You can limit this by reducing the amount of time you give customers to pay.

Just make sure you talk with your legal department/lawyer before making the change. If there are contracts in place, you’ll need to wait until contract renewal.

Offer Discounts

Another way you can improve your accounts receivable turnover ratio is by offering discounts for prompt payment. Let’s say you give your customers 60 days to pay.

You can offer them a five percent discount on their invoice if they pay within 30 days. While it won’t speed up payments from everyone, it will speed up payments from some customers.

Accounts Receivable Financing

Late payment calls put stress on you, your customers, and your staff. One option if you need cash sooner than later is accounts receivable financing. In essence, your business gets an advance from a financing company based on the value of some or all of your current accounts receivable.

The terms vary from company to company, but you offer a percentage of the value to the financing company. The company collects the balance from your customers. You get any leftover balance minus any fees and the advanced amount.

Curious about AR financing? You can discover more here.

Reducing Your Accounts Receivable

Bloated accounts receivable is bad for your business. It leaves your business short of cash when your own bills, to say nothing of payroll, comes due.

That doesn’t mean you’re without options. You can reduce the amount of time that customers get to pay their invoices, though you must do it within the bounds of any contract or service agreement.

You can offer them an incentive in the form of a discount on their invoice for early payment or consider AR financing.

Looking for more business finance tips? Check out the articles in our Business section.