This winter was brutal in every sense of the word, and most people are looking forward to spring. The American Cleaning Institute reports that more than 80 percent of Americans plan to spring clean their homes, a ritual that dates back to the 1700s, when the first days of spring allowed you to open your windows and doors and let out the winter dust and dirt.
For small-business owners, the process of spring cleaning small business finances is one that should be applied to your finances as well. After a long winter of (hopefully) generating sales, managing operations and dealing with daily fires, it’s important to take some time to assess where you are, determine what needs to be cleaned up and then take action.
This five-step plan covers the critical areas of a good financial spring cleaning:
Step 1: Prepare an accounts receivable aging table. An accounts receivable aging table organizes all the money owed to you by customers according to the amount of time the money has been owed. The time outstanding is typically organized into 30 day groups: 1 to 30 days, 31 to 60 days, 61 to 90 days, 91 to 120 days and more than 120 days. You can adjust the table to the specifics of your industry. Government contractors, for example, might need to take the table out to 180 days, while some distributors might prefer to express it in weeks.
The goal here is to determine what percentage of your customers are taking too long to pay. Once you know, you should use this information to pursue unpaid debts. It’s also valuable to help you determine if you need to change your payment policies or even eliminate certain types of customers that habitually pay late.
Step 2: Compare pricing to competitors. Pricing is one of the most difficult areas of a business to get right. Over time, many small-business owners have a tendency to negotiate one-off discounts and deals that can lead to an incoherent pricing strategy. Market conditions may also change, making your pricing too high or, even worse, too low. The best way to make an assessment is to compare your service offerings and prices to those of your competitors.
