Exactly what a creditor does about a receivable at a specific age depends on the nature of his business and the depth of his comfort zone.
It generally follows that, the higher the mark-up, the better the cash flow and the less stock held; the more leisurely any collection effort. These things improve a creditor's ability to survive without his customers' money and often allow receivables to thrive for months.
However, companies with low mark-ups, tight cash flow, low stock turnover, a small fortune tied up in stock or high expenses find it less easy to survive without good cash flow. They usually start work sooner and smarter to collect it.
Receivables are generally considered a company's largest and most important single, current, tangible asset. They appear on the profit and loss sheet; can be used as loan collateral; can be sold at a slight discount or they can be received...in due time!
How much is an account actually worth?
Tangible means 'touchable'. Consider how many of your accounts receivable are, only by the barest fraction, out of reach. If you don't know the answer, find out! Current means 'as of now'. How many of your accounts are you confident you could collect by tomorrow?
The words we use and phrases we coin, often serve to fool only ourselves. If you began a crash campaign tomorrow morning and ran it for two weeks, aiming to collect every cent possible off your debtors' book, what percentage would you actually be able to get in?
Based on this, your debtors' book could currently be worth far less than you imagined...If you undertook, today, to revalue all your receivables to their actual worth, how many thousands, or hundreds of thousands rand would be lost to the company? And could your company withstand the shock of that write down?
So: a receivable is only worth the amount that can be collected, less the cost of collection and less the cost of financing that credit. Many businesses actually reflect a false amount on their accounts receivable.
Accounts receivable depreciate faster with age and far more quickly than any other asset.
Answer these five questions:
1. What is a current account worth? [Almost 100%].
2. Once it has reached 30 days? [?]
3. By 90 days? [?]
4. At 180 days? [?]
5. After a year or more? [?]
Then calculate the finite cost to the company of collecting accounts. Credit, which gives birth to receivables, is only a selling tool. The cost of using it determines the true value of the receivables it creates.
Take into account other factors affecting the true value. Can you rely on payment for all your accounts receivable? Do you exclude items reasonably known to be uncollectible? Do you make provision for bad debts, goods returned, customer deductions, discounts or any special allowances? Are you selling to only top-rated companies or do you maintain, as most companies do, a percentage of marginal accounts?
Were your business cash-based, how many of your staff would be redundant? Do their salaries feature on your expenses list? With this sort of analysis, it becomes clear that receivables are seldom the asset we assume. Not only are they costly to collect, but if no properly-supervised system for handling collections exists within your company, results could be haphazard.
It generally follows that, the higher the mark-up, the better the cash flow and the less stock held; the more leisurely any collection effort. These things improve a creditor's ability to survive without his customers' money and often allow receivables to thrive for months.
However, companies with low mark-ups, tight cash flow, low stock turnover, a small fortune tied up in stock or high expenses find it less easy to survive without good cash flow. They usually start work sooner and smarter to collect it.
Receivables are generally considered a company's largest and most important single, current, tangible asset. They appear on the profit and loss sheet; can be used as loan collateral; can be sold at a slight discount or they can be received...in due time!
How much is an account actually worth?
Tangible means 'touchable'. Consider how many of your accounts receivable are, only by the barest fraction, out of reach. If you don't know the answer, find out! Current means 'as of now'. How many of your accounts are you confident you could collect by tomorrow?
The words we use and phrases we coin, often serve to fool only ourselves. If you began a crash campaign tomorrow morning and ran it for two weeks, aiming to collect every cent possible off your debtors' book, what percentage would you actually be able to get in?
Based on this, your debtors' book could currently be worth far less than you imagined...If you undertook, today, to revalue all your receivables to their actual worth, how many thousands, or hundreds of thousands rand would be lost to the company? And could your company withstand the shock of that write down?
So: a receivable is only worth the amount that can be collected, less the cost of collection and less the cost of financing that credit. Many businesses actually reflect a false amount on their accounts receivable.
Accounts receivable depreciate faster with age and far more quickly than any other asset.
Answer these five questions:
1. What is a current account worth? [Almost 100%].
2. Once it has reached 30 days? [?]
3. By 90 days? [?]
4. At 180 days? [?]
5. After a year or more? [?]
Then calculate the finite cost to the company of collecting accounts. Credit, which gives birth to receivables, is only a selling tool. The cost of using it determines the true value of the receivables it creates.
Take into account other factors affecting the true value. Can you rely on payment for all your accounts receivable? Do you exclude items reasonably known to be uncollectible? Do you make provision for bad debts, goods returned, customer deductions, discounts or any special allowances? Are you selling to only top-rated companies or do you maintain, as most companies do, a percentage of marginal accounts?
Were your business cash-based, how many of your staff would be redundant? Do their salaries feature on your expenses list? With this sort of analysis, it becomes clear that receivables are seldom the asset we assume. Not only are they costly to collect, but if no properly-supervised system for handling collections exists within your company, results could be haphazard.
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