All businesses suffer the problem of outstanding invoices. Late payments and non payments are a fact of life. There’s often a chain effect: where your customers can’t pay you because they haven’t been paid yet, and in turn you can’t pay your suppliers as a result.
These cash crunches can be deadly. Many good, viable businesses go broke because their customers couldn’t pay on time. So how do you know if your centre is behind the curve when it comes to outstanding invoices? How can you compare yourself against other centres to see how you are doing?
What you can do is try benchmarking. Benchmarking is nothing more complicated than having a consistent way to measure and something to compare it to.
For child care centres, the amount of outstanding invoices varies considerably, as does the size of centre, making it hard to compare figures outright. $50,000 outstanding on forty children is usually a worse situation than $50,000 outstanding on eighty children.
Your accountant will call these outstanding invoices your receivables. It's an accounting term that refers to any amount of money due from a customer or any other party.
As an example, let’s imagine childcare centre FreeCC is owed $100,000 and its run rate for parent payments is $12,500 per week. This means its receivables is eight weeks. Comparing it this way allows a fairer comparison between organisations of very different sizes.
Now running your own numbers, figure out where your receivables are sitting at:
- 1-2 weeks: nothing to worry about
- Up to 4 weeks: possible cause for concern
- Above 4 weeks: alarm bells should ring
- 8 weeks: emergency procedures are called for
That said, it’s not only the number of weeks that you should consider. It’s also the trend: is it trending up (getting worse) or down? Four weeks and trending down is better than three weeks trending up.
Eight weeks is still serious no matter how you look at it. But it’s still better to have tightened up your receivables process and be improving, than maintaining the status quo or getting worse.
Once you know the worst, that’s when you can start putting together a plan to improve the situation. The difference between having a business with receivables at two weeks versus receivables at eight weeks may be the difference between survival and failure.
To summarise, here’s a four step plan for benchmarking your receivables.
1. Understand what to measure
If you’re benchmarking your outstanding invoices (or receivables), you need the total value of all invoices outstanding, and the time it takes for them to be paid.
2. Establish and prioritise your goals
Your main aim is going to be to reduce the amount of weeks, definitely below four and preferably below two. If cash flow is less of an issue, improving payment rates may also be a priority.
3. Measure your progress over time
It’s very important to know if your situation is improving or worsening, as this trend may be more important than your current situation. Benchmarking will only tell you where you are. It won’t tell you where you’re going, or where you’ve been.
4. Compare with others
Your industry association may be able to provide you with industry average statistics. You can also buy commercial benchmarking data that gives you the financial figures (anonymised) of equivalent businesses/competitors. If you can't find anything else, you can use the guideline in this blog as a starting point.
Benchmarking helps you determine your relative position in the industry, as well as establish your own baseline. Think of it as a "report card" for your business, and run regular checks.
For more tips on how to stay on top of your finances, download our free ebook ‘Child care services: Getting smart with fee payments’ by clicking the button below.