Improving Cash Flow
As you can see, to grow your consulting services business you need cash. Chapter 15 introduced the concept of cash flow and your cash flow forecast. Once you've analyzed cash flow and determined you need more of it, what can you do? Depending on the type of business you own, you can find increased cash in your accounts receivable and in your inventory.
Failure to closely monitor late payments ties up investments and weakens profits. The more overdue accounts become, the greater is the danger that they will be uncollectible and will have to be written off against profits.
Accounts receivable represent the extension of credit to support sales. In your business, the types and terms of credit you grant are set by established competitive practices. As an investment, the accounts receivable should contribute to overall return on investment (ROI).
Excessive investment in accounts receivable can hurt your return on investment by tying up money unnecessarily. One good way to judge the extent of accounts receivable is to compare your average collection period with that of rivals or the industry average. If your average collection period is much higher than your competitors' or the industry norm, your accounts receivable may be excessive.
If they are excessive, it may be that you're not keeping tight control of late payers. You can check this by developing an aging schedule. An aging schedule shows the distribution of accounts receivable with respect to being on time or late.
If the aging schedule does not reveal excessive late accounts, your average collection period may be out of line simply because your credit policy is more liberal than most. If so, it should translate into more competitive sales and greater profits. Otherwise, you should rethink your credit program.