Every business that extends credit to its customers has to struggle with getting those customers to make their payments according to the agreed upon time frame. One of the biggest cash flow drains that can ruin a business is when those payments start coming in later than expected.
The acceptable percentages of accounts receivable that are past due can vary tremendously depending on a wide range of factors. As a general rule, the average business for multiple industries across the country is shooting for a past due receivables percentage in the neighborhood of 10-15%, but depending on your specific circumstances, your ideal number could end up being much higher or lower than that.
In order to figure out the right target percentage for your accounts receivable, let’s take a look at six of the most important factors that can influence how your business performs compared the industry averages.
Your Specific Industry
One of the most significant factors in determining how much of your accounts receivable should be permitted to fall into past due territory depends on what type of industry you find yourself in.
For example, it would be completely unacceptable for any significant percentage of a restaurant’s customers to wait 30 or 45 days to pay for services rendered, but this is commonplace in many other service industries.
Your Business Liquidity
Depending on how long you have been in business and how solid your financial foundation is, you might be in a position where you are willing to let your clients go a little longer than the average business in your industry before settling their account balances.
Some smaller businesses on solid footing can actually use this as a competitive advantage, but they also have to be careful to avoid being taken advantage of.
Your Credit Policy
The wording of your credit policy can also play a huge role in determining what your clients are able to get away with in terms of late payments. If your penalties for late payments are not significant, you can expect that customers will take advantage of that and wait to pay you.
Your Individual Clients
Another significant factor in determining what percentage of your accounts is a reasonable amount to fall past due is the types of clients you are working with. If they are the type of people who have deep roots in the community and you don’t expect any long-term problems, it is more reasonable to relax your deadlines than if you are dealing with customers you don’t know nearly as well.
Your Exceptions to the Rules
Often times, the number of accounts that are past due are skewed by just a handful of clients that have been with you long enough that you consider them exceptions to the rules. If this is the case in your business, it might be completely reasonable for the number of accounts past due to be slightly higher than your industry average.
Your Business History
While all of these things are possible influences on your accounts receivables, the best way to gauge what is a fair number for your business is to simply track what that number has been over the life of your business. If you have always had a lower percentage that is suddenly getting higher, you might have a problem on your hands.
At the end of the day, most business in most industries shoot for a target that is somewhere between 10% and 15%. Depending on how these factors impact your day-to-day operations, you might be slightly different, but as long as you have a valid explanation and a plan for clients who don’t pay, you are already going to be on the right track.