If you’ve not quite received the message, let me repeat it. Your cash flow is incredibly important and you need to look at it regularly – like every day. See the other butts on cash runway and cash flow.
Your ever-changing cash pile is determined by the cash that comes in (in the form of investments, loans and sales) and the cash that goes out (mainly to suppliers, banks and anyone else that has given you credit). These are your Receivables and Payables respectively.
Your job over time is to replace the investment and loan monies, with money that comes in from customers, and to grow the cash that you have. Otherwise you risk losing control of your business - see the butt on Dilution.
Your Receivables (or Accounts Receivable (AR)) is a list of the customers who owe you money (money you are yet to receive) and the length of time it’s taking them to pay. Each of your customers will have a ‘payment due’ date – that could be before you provide them with your product or service, as soon as you provide it, or after you’ve provided it. If you’ve given your customer credit terms of, say 10 days, then they should pay you 10 days after you’ve provided them with your product or service. Sometimes they might not pay exactly on time and you will get a litany of excuses, from forgetfulness, to can’t pay, to won’t pay. You will need to urgently deal with those.
Your receivables’ list may include the following:
Amounts that have been invoiced but are not yet due because the credit terms you offered have not yet expired. If there are a lot of these you can categorise them into, say, due in 1 – 5 days, due in 6 – 10 days, due in 11 – 30 days, due 31+ days, depending on how critical the time of payment is for you. This will give you an understanding of when the cash should come in.
Amounts that are due now.
Amounts that are late. They should have been paid but are overdue. Again these can be further categorised into 1 – 5 days late, 6 – 10 days late, 10 – 30 days late, 30+ days late and so on – God forbid!
You can total up each column to see how much you are due and when it should arrive - this will allow you to put together a short-term cash forecast when you add your payables to it.
Here's an example of the type of receivables report I like:
This report shows it all, and in this example it's not a pretty sight. I have £58,000 of invoices to be paid, of which 30% are late! Customer 7 is more than 11 days overdue and yet we sold another £3,679 to him - why? He has a big chunk more than 11 days overdue. My sales head is about to receive a butt kick! With Customer 10 we know we have a quality issue, which we are resolving, so we're not going to be paid by him. But we need to chase the 4 other late payers today and get that money in - that is £16K we can use. We should get in £12K today and £16K in the next week. We need to keep an eye on all these payments
If you run accounting software, then be sure to put the payment terms on the invoice and you can get an up-to-date receivables’ list automatically at anytime. Otherwise you’ll need to look through each outstanding invoice and figure out the date on which payment is due.
Review your receivables regularly and be very proactive with the customers who are overdue. And make sure they don’t get any more from you until they have paid.
Remember you can also encourage customers to pay early, by offering them a discount for early payment.
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