Understanding Cash Collection Cycle

Understanding Cash Collection Cycle

The cash collection cycle refers to the number of days the company needs in collecting its accounts receivable. This cycle is crucial in monitoring the capability of a company to give a logical amount of credit to its trustworthy customers and its ability to collect the accounts receivable on time. This proves that all the companies should pay attention to completing their accounting tasks as this helps the management to discover any problems in collecting the profits earned. Hence, as a business owner, if you meet challenges in doing the accounting-related tasks, you should hire an accounting firm in Johor Bahru and let the experts help you.

The concept of cash collection cycle is not the same as that of the cash conversion cycle as the latter refers to a more extended period which starts from the outflow of cash to pay for goods and ends with the receipt of cash obtained from selling the goods. To calculate the collection cycle, business owners need to divide the company’s annual credit sales by 365, then, divide the average accounts receivable by the resulting amount.

Business owners should keep their cash collection cycle short. The shorter it is, the better. This is because:

  • Short cash collection cycle means that the company can collect its cash more rapidly. Therefore, it has more cash on hand, and it has lower borrowing requirements.
  • Generally, the longer the invoices remain outstanding, it gets more difficult for the business to collect the payment.
  • The company may not be able to use older invoices as collateral to get a loan.

On the contrary, if the credit policy that the management uses is more relaxed, having a longer cash collection cycle may be acceptable. Such type of credit policy enables the company to extend credit to more marginal customers, which the possibility of receiving payments from them are lower.

To speed up cash flow (Also see Accounting –  How to Boost Your Cash Flow), you, as a business owner, should always try to collect outstanding accounts receivable more quickly. To achieve this, you should:

Issue the invoice on time

You should always issue the invoice to your clients once you have sent the goods or have provided the services. If not, as you did not provide your clients with the documents about what they should pay for, you are delaying the collection process.

Contact your clients before the invoices become outstanding

Contacting your clients who make up some of the most substantial parts of your accounts receivable before the due dates can be a quite cost-effective way for you to collect the payment. Doing so helps you to reveal issues about the payment that you may start handling immediately instead of discovering the problems a few weeks after that, which is what usually happens to the business owners.

Pay the client a visit

The client is less likely to delay the payment if you are meeting them face-to-face. This is undoubtedly a very cost-effective way for substantial overdue amounts.

Ask your salesperson to collect the payment

If you have hired hands-on salespersons to make sales for your company, you should let them collect the payments as they are the most familiar with the clients (Also see Signs Which Indicate That You Should Start Employing).

Get the payment for undisputed amounts

If your client complains about one of the line items on the invoice, you should insist on collecting the payment for all other line items as you look into the disputed amount.

Send dunning letters to your clients

You need to send automated notices to your clients as reminders about the payments which are almost due or have past due (Also see What Are Outstanding Cheques).

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