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Long Outstanding Accounts’ Impact on Business Financial Health: For Accounts Receivable the Longer an Account is Outstanding

For Accounts Receivable the Longer an Account is Outstanding

The longer an account is outstanding, the greater the risks and repercussions we face. It’s pivotal to grasp that unpaid invoices lead to dreaded cash flow issues. Cash flow, after all, is the lifeblood of any business; when it’s disrupted, businesses suffer.

Primarily, when accounts remain outstanding for extended periods, the company’s liquidity is at stake. Liquidity, or our capacity to cover immediate and short-term obligations, can take a hit. This scenario severely affects our ability to stay afloat, invest in growth opportunities, or even meet day-to-day operations costs. Thus, timely payment collection becomes a cornerstone for financial solvency.

Accounts outstanding for long also run a high risk of becoming bad debts. The probability of non-payment increases as accounts age. According to the commercial collection agency survey, the likelihood of fully collecting an invoice drops considerably to 76.7% after just 30 days past due. This figure further drops to 25.2% once an invoice is 90+ days late.

Furthermore, the extended collectibles period has an indirect effect on our customers’ perception. It potentially gives an impression of laxity in our financial control systems. Trust is paramount in business, and any hit on this can have long-term repercussions.

To effectively manage these risks, we advise taking a proactive approach in accounts receivable management. Early invoicing, effective follow-up mechanisms, and having a proper credit policy are just but a few strategies to consider.

The Importance of Timely Payment

Timely payment is crucial when it comes to managing accounts receivable. Many companies overlook the importance of getting paid on time. However, timely collection has several long term benefits for the overall financial health of a business. Let’s take a deep dive into the financial implications of delayed payments and their effect on credit score.

Financial Implications of Delayed Payments

Delayed payments have a significant impact on the cash flow of a business. When payments are late or not made, a business has less cash on hand. Reduced cash flow decreases the flexibility for investment or operational activities. This situation can lead to financial hardships.

Delayed payments also imply a higher risk of the amount becoming a bad debt. The longer an account is outstanding, the lower the likelihood to collect the full amount owed. This leads to the erosion of the business’s profitability and bottom-line.

To add to the woes, managing receivables also has associated costs. Sending reminder letters, making follow up calls and potentially taking legal action to recover amounts owed all consumes resources. So delayed payment also impacts a business by increasing indirect costs.

Impact on Credit Score

Just like individuals, businesses also have a credit score. This score reflects the likelihood of the business defaulting within the next 12 months. Timely collection of payments plays a crucial role in maintaining a healthy credit score.

When payments are consistently collected past the due date, it reflects poorly on the business’s credit management practices–leading to a lower business credit score. Credit reference agencies record payment behaviors, meaning each delayed payment has the potential to harm the business’s credit score.

A low credit score affects the borrowing capacity of a company. It can result in denial of new credit or by receiving infavorable loan terms. In some cases, vendors may insist on upfront payment or shorten the payment duration.

High value deals also take into account the credit score. Existing and potential business partners could perceive a low score as a risk factor, possibly leading to missed business opportunities.

The Benefits of Prompt Account Resolution

Handling accounts receivable quickly and effectively offers a plethora of benefits. It’s not just about avoiding the negative sides of delayed payment – let’s explore the positive impacts of promptly resolving account receivables.

Boosting Cash Flow

One of the significant benefits is a healthy cash flow. Timely payment of invoices leads to a more regular flow of cash which, in turn, increases the ability for businesses to meet obligations. A strong cash flow also provides flexibility, allowing us to grab opportunities as they come, whether they’re potential investments or operational necessities.

Reducing Debt Risk

Accounts outstanding for long periods have a high risk of developing into bad debts. Prompt account resolution minimizes this risk. Receiving payments on time aids in reducing the number of unpaid or overdue invoices, which directly correlates with a dip in the potential bad debts.

Enhancing Financial Control

Prompt account resolution reflects robust financial management practices. It gives an impression of efficiency, professionalism, and competent financial control—it’s about a lot more than numbers on a page.

By considering these points, it becomes increasingly clear why a prompt resolution of accounts receivable is not just desirable, but essential for a financially healthy, relationally robust, and efficiently run business.

Jeremy Edwards
Jeremy Edwards
On Chain Analysis Data Engineer. Lives in sunny Perth, Australia. Investing and writing about Crypto since 2014.

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