Understanding Cash Collection
Finance Friday is back, and this week we are going to explore cash collection. Last week we looked at how your company brings in revenue. We spoke about making the sale, but once you have made the sale how are you getting paid?
How do you get paid?
There are a few ways to get paid. At the time of purchase, your customer may provide cash in exchange for the product or service. That is the best case scenario when cash collection happens at the same time at the sale both your revenue and your cash increase at the same time. Your customer may also pay with a credit or debit card, which means you will have the cash in your bank account after a few days for processing. The downside is that most credit card processing companies will take a percentage of the sale as a processing fee.
Depending on your business structure you may not receive payment at the time of purchase or service. Some businesses will issue their clients an invoice which the client will pay at a later date. Typically an invoice will have 30 or 60-day payment terms. Often you will see "Net 30" on the invoice, this indicates the payment is due within 30 days. Payment terms indicate how many days until the merchant will receive cash.
Accounts Receivable (AR) is a balance sheet account that holds all the sales which clients will pay at a later date. Monitoring your AR account is a vital step in managing your books. You will want to know which clients owe you money, how much money and when the invoices are due. This information will help you understand the amount of cash you are expecting to receive.
Understanding how much and who owes you money is step one. The next step is to monitor to ensure payments are received on time and for the right amount. Your business should have a process to reconcile the cash received against the AR balances.
Cash is King:
By tracking the AR, you will be able to follow up with clients who have not paid. Your process should also include the ability to track the payment amount. Tracking the amount paid will ensure that you received the full amount for each transaction. As the saying goes, “Cash is king, ” and you want to make sure you have received all the cash you are entitled to promptly.
Risks of doing business:
Risks are inherently part of doing business. One risk you will run into is that some customers will not pay you. When you are reviewing your financials, you should always account for this risk. In the accounting world, this is called the allowance for bad debts. In a later post, we will talk about different ways you can account for this.
Now we have looked at both revenue and cash collection, this is one-half of the financials. Next week we will start to explore expenses and then later the accounts payable. Understanding your financials is vital to your success as a business owner. At Finergy we can provide both the bookkeeping and the analysis behind the numbers. Call us today if you have questions regarding your financials.
See you next week!
*We hope you enjoyed our blog. Please note that the intent of this blog is to provide general information and should not be construed as financial, financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services.