When you gamble, there is a chance that you will win, and a chance that you will lose. You take a risk, hopefully of the calculated variety just about every day in your business. You take a risk when you take on a new customer that they will be loyal and profitable to you. You take a risk when you invest in a new product that it will function as advertised.
One of the biggest risks that small businesses take is extending credit to customers. Although you have some basis for making a credit decision, it is truly a leap of faith. It is vitally important to the health of your company to keep track of your receivables, and to have a plan to recover the money owed to you.Nothing will crush a small business faster than letting your customers go too long without paying. Waiting, or doing nothing, comes at a cost. There are “soft” costs, which we have outlined in a previous post. The hard cost is even more immediate – a hit to cash flow.
Without cash flow, it is tough to run your business, and tougher still to grow your business. I recently met with an entrepreur who was borrowing money from a bank because he needed new equipment and did not have the cash because customers were not paying. So, rather than pursue the money owed to him, he himself took on debt. It does not seem to make sense, but it happens all the time, because small business owners are either afraid of losing customers or are just not comfortable asking for money. So they do nothing, and let the pile of receivables grow and grow.
If you do nothing to recover the money owed you, you will have no idea about the ability of your customers to pay you back. We see it all the time. Companies hold off for six months or even a year before pursuing bad debt, and when they finally address the issue, they find that the customer has had a reversal of fortune, and owes many other creditors. On the other hand, if you communicate regularly with your customers, you will get a sense that a problem exists and perhaps be early enough to catch the problem. If customers totally ignore your phone calls and invoices, you have a problem – do not wait to send those customers to collections!
Stay on top of your accounts receivable turnover as it is a good measure of how effective your credit policies are, and how well you are bringing in credit payments.
Save the gambling for Vegas, or better yet Monte Carlo. You deserve to be paid for the work you do, and it is in your power to make sure that you are.
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