The Best Ways to Prevent Overdue Accounts Receivable and Accounts Payable
The best way to prevent overdue accounts receivable is to ensure that all current debtors are current with their individual payments. This can be done in several ways. One option is to have the customer setup an auto payment plan, allowing the company to receive the monies owed automatically over a predetermined length of time.
This method usually entails offering the customer a line of credit and is slowly gaining popularity. Another way is to have the customer pay for the entire amount at once, which is the most common way such things are done. In this method the customer pays the full amount at the time the goods or service is received, thus their balance, and the account receivable balance for this transaction, are at zero immediately following the transaction.
The third method is for the customer to prepay for the goods or service. This method has the customer pay BEFORE they receive what is being purchased, and keeps the respective accounts at a zero balance for the transaction. A variant of this method is where the customer prepays for part of the transaction, leaving a deposit, paid prior to receiving the service or goods, then either paying the rest in full upon delivery or making scheduled payments of a predetermined amount over the course of a predetermined time line. Using one, or all of these methods in combination can ensure that a company’s account receivable is never overdue, and that it’s outstanding monies owed are paid in a timely fashion.
The best way to prevent overdue accounts payable is for a company to enter into agreements with the other companies it does business with, that allow it to either prepay all of it’s accounts on a regular basis for fixed usage goods and services. For example, prepaying for the twenty-three cases of fax/copier toner used each month.
Another way if to setup a line of credit with another company for its services and setting up an auto pay schedule to pay predetermined amounts over a predetermined time frame. Thus this will allow the company to purchase goods and services as needed without the risk of not being able to pay for needed supplies or services. Also the company may engage in a policy of pay as needed goods and services, paying only for goods and services as it uses them or upon delivery. By using all of these methods, a company can ensure that it can preform it’s daily tasks and duties, without incurring a large amount of debt to other companies.
Ideally, the best way for a company to avoid these situations is to ensure that it’s accounts receivable is taking in more than their accounts payable is required to pay out, basically that the company turns a profit. If the company owes more than it takes in it is failing as a business. If it takes in monies exactly equal to it’s operating costs, then it is not succeeding, but neither is it failing. When a company turns a profit, it is then that it is considered profitable, and can use the profits to expand its operations and scope, as well as make improvements to its facilities and even hire more staff.
Doing this and even opening new locations and expanding their product line and services offered will, granted, incur them more debt, but it will also allow then increased revenue, which will hopefully cause a greater intake of profit, allowing greater expansion. If the company keeps up this profit cycle, then it will eventually turn a large profit, and thus will keep its account receivable and its account payable to profitable balances.
Granted this is an over simplification of the process, and in order to maintain it’s maximum profits, the company will need to ensure it is getting the lowest prices from its suppliers and getting the maximum profit from its customers, but this is the most basic general principle of operating a business. This is possible though business to business negotiations, is easily achievable for any company willing to invest the time to do so. So in closing, through negotiation, smart business practice and expansion a company can prevent overdue accounts.