Accounts Receivable Riskiness

24 07 2010

Sales growth is only part of the equation when thinking about expanding your business; getting paid is the obvious other priority (and it just might be the biggest one). After all, if you’re not able to collect on your accounts receivables, it’s pretty hard to pay employees, manage operational expenses, or even consider planning for the future.

I’ve previously written about “Ensuring Customer Payment” and the importance of due diligence on a business owner’s part for following up with customers and making transactions more seamless. But have you ever analyzed the diversity of your ‘accounts receivable risk?’

OPEN Forum recently posted an article about accounts receivable risk and determining your accounts receivable concentration risk ratio. This ratio basically maps out who owes you what, and how much each value is relative to everyone else. It’s a great exercise for both economics geeks and, well, the rest of us who just want to get paid. Because accounts receivable risk refers to the likelihood that a particular customer becomes unable to pay what they owe, the goal is to have a ratio that is less concentrated so that your business is not dependent on the impact of one company failing to pay. (Check out the formula for calculating your business’ concentration ratio here.)

Reducing your concentration ratio is the next step.  This can happen by selling more to new customers or incentivizing your largest customers to pay faster through discounts for early payments or other benefits.  If you have leverage with your customers, you can also mitigate the risk of non-payment by acquiring credit insurance or using accounts receivable factoring companies to purchase your receivables in order to give you immediate capital. Although, factoring companies only give you a percentage of your accounts receivables, the capital inflow to your company is immediate and this type of small business financing can give you the jolt that is needed to kick-start your company.

At the end of the day, it always comes down to money. With the right information at hand, you’ll know which accounts need more hand-holding than others – and hopefully, a few tips for how to influence faster payment at the start.

Photo courtesy of Breakmould.

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