Accounts receivable question

[emr]

I have been wondering if there is some rule of thumb regarding your AR number. I have heard that you dont want it too big because that means that people are not paying you. I know what I feel comfortable within our company but thats just my gut feeling. Is there a certain ratio that you should shoot for? And what would compare it against? Accounts payable? I what our usual monthly expenses are and I just compare our AR to that number all the while taking into account how much cash we have on hand.

Does any of that make sense? That's exactly why I need some help on this subject.

 

[sotc]

I start calling folks at 30 days. As long as I have working capital I don't care how much is in receivables if it is not late

 

[arborworks1]

I'm about the same way as Willie. I don't really think there is a ratio to shoot for. At least not with a small service type business like most of us.

 

[emr]

Perfect. I wasnt sure if you always tried to keep 1.1 X your payables, or .75 of your whatever.....

I agree about keeping people current. And as long as we have work sold and AR coming in, we are all good. As long as there's more coming in than going out.

 

[arborworks1]

Maybe that's a good ratio to keep!!!!

I have a goodtime hassling Willie about our Acoounts receivable. Seems to be a heathly competition between us at the moment.

 

[sotc]

Few coughs at the other end

 

[arborworks1]

Ha. Time to step up!!

 

[sotc]

Stepped up this week!

 

[Reddog]

AR and AP are judged by comparing to your forecast budget for the year and then month.
Any set yearly contracts would be your base line AR for the Budget.
Budget AP is any know expenditures for the Budget year. Salaries, Insurance, Rent/Property payments are some examples.

Then you can compare your actual AP and AR to see what your projected outcome will be for the Month/Year.
This may help you get a ratio that works for your business.

 

[emr]

Good info. The problem for us is that we have never had a yearly contract for work and I doubt we ever will.

It seems that all of the info out there is for larger companies that have more set incomes and expenses than we do. Maybe for small companies, the owners have to operate on their gut feelings more than anything else. That's hard for me to do since I am a numbers guy. I like to have some guidelines to follow to confirm what I am doing is correct.

 

[Reddog]

Fully understand the gut side of small business. No yearly contracts will make it had to set AR budget numbers.

One option that you may already be doing being a numbers person is: you could set your forecast budget all on AP, that would give you and idea what your AR needs to be monthly to cover it.

 

[Reddog]

Another thing that can help is: do you back load all your data by month for years past to be able to trend based on your current year.
Trending can be a big help in understanding growth cycles and yearly cycles, then helping to forecast short comings in growth or work load.

 

[emr]

We do keep all of our records so we can compare year to year. We are only in our 4th year so it is very easy to compare since day one. That is how we have been doing it. We just see what the trends have been and use that as our baseline. After that, its how we feel we are doing and what new purchases we need to make.