Question

If you were a small business owner, how would your inability to collect your receivable timely affect your business operations?

Answer 1

Introduction:

Timely and efficient management of receivable is one important step in the smooth functioning of any business. The non-collectivity of the same can also lead to losses and shutting of the business.

Solution:

To start with let us first understand some of the needs of cash by a small businessman. A small businessman will mainly require cash for the following purposes:

1. Rent

2. Salaries to employees

3. Repayment of vendors for goods purchased

4. Maintenance expenses

Now, if the small businessman is unable to collect his receivables on a timely manner, there will be delays in payments that the businessman has to make. This will lead to curtailment of credits by its vendors and hence, he will be unable to purchase goods/avail services. Delays in payments to vendors will also lead to spoiled relations and hence, difficulties in receiving credits in future. Also, if he doesnt receive his receivables on time, he will be unable to pay salaries to employees on time and this would effect the loyalty of employees and may also lead to losing the employees.

Conclusion:

Since, a small business has lower working capital levels, the business has to efficiently manage its receivables. It has to time its receivables as per the timings when it has to pay its vendors and pay for other activities for day to day functioning of business. Non-timely collection of receivables can lead to cash crunch which can result in huge losses to the business and spoiling of the business reputation and name.