Accounts Receivable Department: “Hi Jim, we have your order, but we will not be able to ship it to you until you pay for your last three orders.”
Jim: “I can’t wait that long, cancel the order.”
I figured a bit of accounting humor would lighten the mood for this not-so-laughing matter of accounts receivables. At one point or another you have probably encountered a similar situation as above. Whether you are a supplier, funeral home owner or outside-industry businessperson, most likely hearing “accounts receivables” makes you cringe just a little. If you are not cringing now you may be after reading the next several paragraphs unfolding all of the additional costs associated with receivables.
We all know the number one business killer is having no cash, as you cannot meet financial obligations, explore growth opportunities or even have a business. You may have the best services and funeral director staff in town, but if you cannot collect payment for those services then your business will ultimately struggle. Before we dive into how accounts receivables are crippling your business, we must identify if you have an accounts receivable problem and why it is there in the first place.
You may have accounts receivable problem if…
- You call past due accounts when you need to make payroll You stop trying to collect after 90 days
- You are waiting 30, 60, 90 days or beyond for insurance company payment
- You have no idea what your Days Sales Outstanding (DSO) is
- You have to increase your credit terms in order to reduce DSO
- You have more accounts receivables over 30 days than current
Some funeral home/cemetery owners simply have poor accounts receivables because of bad paying customers. Many funeral professionals go to great lengths to extend payment leeway for struggling families, but in the end, this has severe consequences on their business. Additionally, insurance companies are posing multiple challenges to funeral professionals, including delay of payment. Funeral homes are often waiting 30, 60, 90 days or beyond for payment on services, and sometimes getting shorted on payment or not receiving payment at all.
Sadly, many funeral home/cemetery owners are unaware they have an account receivable “problem” as they may have year-round business consistency, which is the ultimate goal. If you have enough money to cover overhead expenses, payroll, and your suppliers then you are set, right? Technically yes, however many funeral home owners who remain uninvolved in their business’s finances may not be aware there are outstanding receivables or room for improvement.
Whether you know you have an accounts receivables problem or are in the dark on your business’s finances, realizing the hidden costs involved in outstanding receivables will provide you the knowledge to improve your receivables, cash flow and bottom line.
Based on a study done by the Harvard Business review, the most common hidden costs of receivables are:
1. Time of Cost
The cost of carrying receivables is often equated with time of cost. Believe it or not time of cost can be estimated by your accountant and is calculated using discounted cash flow (DCF), which is a valuation method used to estimate investment and cash flow opportunities. While “time is money,” this is only one of six cost elements affecting your receivables.
2. Administrative Costs:
Telephone calls, follow-up letters, record keeping and general collection processes are cost intensive and only grow larger the older the age of the receivable. You may have a rock star accounts receivable team but sometimes even Janice, your MVP cannot even collect from families, creating additional administrative cost when she has to turn the bill over to a collection agency.
3. Bad Debt
The cost of debt relates directly with the age of the receivables. The longer a receivable ages, the more unlikely the full amount will be covered, ultimately costing your funeral home money.
4. Financing Cost
If your business is having difficulty collecting receivables to pay for general overhead and business expenses you may need to finance and borrow money until you are able to collect from your own customers.
Without a consistency of collections, it is difficult for a business to forecast financing. This factor is especially pressing in the funeral profession where seasonality and death rates can make business unpredictable.
When your money is tied up in accounts receivables you have no potential funding for expansion, marketing, investments or the opportunity to take advantage of supplier promotions and discounts.
The 2009 Harvard Business Review Cost Elements of Accounts Receivables Analysis:
Though this study is nearly 10 years old the valuation method to determine the cost of each element is current.
Factoring in each cost element, this chart reveals if you were to have a $5,000 invoice outstanding for 60 days, you are losing an additional $450, and $1,350 for 120 days overdue. Are you cringing now?
You are probably wondering what solutions are available to improve your accounts receivables.
1. Payment Terms
While this profession is unique in practice, how you are paid should not be. You should set clear payment policies/terms and provide services only after receiving valid forms of payment.
2. Offer Multiple Payment Methods
With an average funeral cost of $7,000 (NFDA, 2016) and 63% of Americans without $500 in their savings to cover an emergency (Forbes, 2016), families are looking for alternative options for funeral payment. Allow your families to pay with life insurance policies but be certain to outsource to a reputable insurance assignment funding company. Funeral homes processing life insurance assignments in-house are experiencing multiple challenges and are waiting extensive periods of time to get paid for services, which effects your accounts receivables. Utilizing a funding company can help free your receivables and help you maintain consistent cash flow.
3. Consider Hiring An Accounting Company
As a business owner it is important to know when to outsource. As a funeral professional you are responsible for multiple roles, you are grief counselors, event planners, embalmers, florists, caretakers and beyond. One aspect of your business you definitely want to manage properly is your accounting. Money keeps the business going and hiring a team of number-savvy professionals will allow you to focus on what matters most, running your funeral home/cemetery.
As a business owner, positive cash flow management is essential for your firm’s long-term survival and not managing your accounts receivables properly can have severe effects on your business. Communicate with your staff and develop solutions to improve your accounts receivables, your business will thank you.
References: Tom Green, AmerAssist AR Solutions, Inc., (2014). Harvard Business Review (2009).