HOW TO GROW SALES 1: Manage your accounts receivable
One of the most effective ways of stimulating sales is by injecting a credit program into your sales program (i.e., set up an accounts receivable). However, you don’t want to have a lot of sales, but end up lacking enough cash to continue production and pay for operating expenses. Prudent thumb rules to follow are:
1 It goes without saying that you cannot extend credit of however short a term to customers whom you do not know or whom you know to have doubtful paying habits.
2 As a general rule, the portion of your sales on credit should not go beyond 25% of your total sales.
3 One way of estimating how much of your sales can be on credit is to check out how much credit & for how long a period businesses in your trading area (specially those in direct competition with your products) are giving. After finding out this information, estimate what you can actually afford and set it up as your accounts receivable policy.
4 In determining how much credit you can afford to extend, consider how much cash you need on hand to continue production (i.e., purchase raw materials & pay for labor) and meet operating expenses.
5 Be aware that, no matter how closely you scrutinize your customers before extending credit, there will be some (hopefully, only a few) who will not be able to pay on time or neglect to pay at all. Thus, a buffer percentage should go into determining how much credit you can actually afford (i.e., thumb rule #4, above).
graphics by Ren Garcia / image from Microsoft Clipart
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POSTED IN: Accounting Concepts, Accounting for NonAccountants, Accounts Receivable, Best Business Practices, Cost of Goods Sold, Small Business Finance, Success Accounting
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