What AreYour Accounts Receivable Worth? (July 2011)

What are your accounts receivable worth? Almost every business has Accounts Receivable (AR) that are older than they would like. Managing them can be a difficult process. To start, management has to be honest with themselves about the value of their AR.

Too often, management allows old AR to sit on the books and ignores the problem. Often, they don’t want to take the write-down and absorb the loss into their financial statements. Obviously, it will lower current earnings as well as negatively affect their debt/equity ratio and they are concerned about the impact this might have when they show their financial statements to the bank. I’ve got news for companies that take this approach. The bank is making those adjustments in any event. They always wipe out old AR assuming they are uncollectable. Not only is management getting dinged for the old AR but at the same time they are also taking a subtle knock from their banker for not recognizing this on their own and taking an allowance for doubtful accounts.

At one of my clients we had two customers each with substantial AR balances (about $50,000). We treated them in the same way and the result with each is likely gong to end up being the exact opposite. In both cases, the balance built up over some time even though there were payments being made (sometimes lower than the monthly service and some months missed with a promise to make good “soon”). At some point, however, both customers got a “shut off notice”.

With the first customer, they made a substantial payment upon receiving the notice and made payments each month which covered current services and some amount against the past due. It took some time but today they only owe about $700 and that is all within terms. Ultimately, this scenario worked out well for all parties. We got paid in full and have a very loyal customer because we helped them work through a challenging time in their business.

The second customer story isn’t nearly as good. It starts out the same, but by the time we sent our “shut off notice” the IRS was taking action. As a general rule, the IRS is the 3,000 pound gorilla in the room and almost always wins. Now we’re part of a creditor group and there is no telling how much of the remaining balance we’ll recover from the dollars (if any) left after the IRS debt is settled. Ultimately, the customer is out of business. Had we moved sooner, our exposure would have likely been smaller and the customer probably would have failed sooner.

Recently, I had lunch with a great business attorney. Her advice was that every company should have a defined process taking a certain action at 30 days past due, 60, 90 and eventually turning the account over to an attorney or collection agency. Good advice.

All that being said, the message is that every business should realistically review its accounts receivable on a regular basis. No one is well served by leaving doubtful AR on the books and “hoping” they will some day turn good. I’ve never regretted calling a customer early about an outstanding balance . . . but there are certainly times that I’ve regretted waiting “just a little bit longer”. What are your accounts receivable really worth?

If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to

your cash is flowing. know where.®
Ken Homza
Copyright @ 2011 Homza Consulting, Inc.

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