A Simple Formula To See if a Company is Financially Sound

Whenever I used to see my grandfather, he would always ask me two questions. The first was, “How is business?” I would invariably say something like, “Good,” or “Fine.” The usual platitudes that make up most of what constitutes small talk. His second question was more important and not usually part of any small talk kind of conversation.

“How are collections,” he would ask me. The honest answer was, back in those days, it was hit or miss.

Asking me how was business was a forward-looking question: how much money was in the pipeline to be paid for the services that were being rendered now. Asking me how collections were doing as more pointed and forced me to realize the importance of managing my accounts receivable.

Richard, my accountant, once gave me an easy formula to identify how “financially sound” a company is when it comes to being able to pay its obligations:

(Cash + Accounts Receivable) / Accounts Payable

If the answer is two or higher, then you were in good shape. If the number is less than two, you have some work to do.

Managing receivables is a game that some people and companies do not play well. But you need your money. You are not a bank.

Do you have a process to review receivables on a recurring basis?
Do you have an automated-email set to go out when receivables are due?
Do you have a client portal allowing clients to pay, or review invoices?
Do you accept multiple ways clients want to pay?
To some, including myself, it’s more about how quickly I can get the money rather than the 1% (or 2%) that I give up to get that money faster.

Don’t ever lose sight of the importance of collections. Visit us at NowITWorks.com to learn more about our approach and the value we bring as a strategic partner.