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Converting accounts receivable into cash is a critical process in the development of a healthy cash flow. While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments from your customers requires a steadfast commitment to a systematic process of Accounts Receivable Management. To more effectively convert accounts receivable into cash it’s essential that the credit and collection process be highly efficient in order for you to shorten the accounts receivable cycle time.
The accounts receivable cycle starts with a sale (credit sales) which in turn creates a receivable (monies due your company), and then, ultimately converts into cash. The length of time that it takes your company to complete this cycle, from sale to accounts receivable to cash, is the collection period. The shorter the collection period, the less time cash (capital) is tied up in the business process, and thus the better for your company’s cash flow.
If, as many experts agree, that the golden rule of business is “cash is king,” then happiness in business is a positive cash flow. Cash flow is the movement of money in and out of your business over a defined period of time (weekly, monthly, or quarterly). If cash coming into your business exceeds the cash going out of your business, your company has a positive cash flow. However, if your cash outflow exceeds the cash inflow, then your company has a negative cash flow. To create a positive cash flow, generate more cash and collect the cash in a more timely manner and at the same time, maintain or reduce your expenses.
Positive cash flow does not happen by accident; it happens because
Henry Ford once said, “Money is like an arm or leg—use it or lose it.” There is a lot of truth in Mr. Ford’s statement. One of the biggest challenges that entrepreneurs face when building a business is getting, keeping, and managing money.
In fact, of all the aspects of creating, establishing, and growing a small business, financial management is the most problematic for small business owners. When it comes to launching and growing a business, sound financial management practices are also the most critical predictor of success.
Getting the greatest possible return on your investment, starts with good financial records. Simply put, any small business that fails to keep complete and accurate financial records places its long-term success and survival in jeopardy!
Take note of the following three (3) reasons why you should maintain complete and accurate financial records – it’s critical for your business success:
One of your company’s strongest assets is its ability to assemble anAnnual Operating Budget andCash Flow Estimate and to determine financial requirements for achieving revenue goals. In order to make wise, financial decisions, it is imperative to know your breakeven point, your direct labor costs in relation to your cost of goods sold, and your monthly cash requirements. Acquiring operating performance data, on a timely basis, strengthens your ability to better manage your business.
Reliable operational plans, budgets, and forecasts –that are accurately produced–are