Editor’s Note: This article is part of Inc.’s regular report on business niches in partnership with financial information company Sageworks.
Do you require cash upfront from your customers?
Depending on the industry, it may be common to wait 100 days or more for payment for goods or services. And if your company is incurring the costs of a sale–such as labor, supplies, or overhead–more than 100 days before it receives any revenue, you should be prepared to cover any potential cash shortfall.
Sageworks has compiled a list of the 10 private company industries with the highest average accounts receivable days–a measure of how quickly a company is paid by clients. At the top of the list is management of companies and enterprises, with 125 accounts receivable days during the 12-month period ending August 31, 2015. Some of the businesses in this sector include financial managers, accountants and auditors.
Oil and gas extraction, technical and trade schools, and automotive equipment rental are the other industries with average accounts receivable periods of more than 100 days. This compares to the private company average of just 39 days. Private company accounts receivable days have remained fairly consistent over the past five years, averaging between 35 and 40 days, according to Sageworks data.
“Entrepreneurs entering an industry with historically high accounts receivable days must be ready to mitigate this payment delay in some way,” says Sageworks analyst Libby Bierman. The longer the payment cycle, the higher the likelihood that the company may experience cash flow issues.
So is it bad to have a high number of accounts receivable days?
While no business owner wants to sit around waiting for payment, it isn’t necessarily bad to have a high relative number of accounts receivable days, according to Bierman.
“Often, this number is a function of the business model and expectations in the industry,” she says.
Still, this metric is very important for entrepreneurs to keep tabs on. If a competitor is gaining profit at a faster rate because of more efficient payment terms, other businesses need to be aware of these practices if they want to remain a viable option in the industry. If a competitor is offering more lax payment options to appeal to customers, that is also something to be aware of.
Business owners need to ensure that they are mindful of their peers’ payment practices so that they are not at a disadvantage. If your accounts receivable days are increasing year-over-year, that may be a warning sign. And the longer the payment cycle, the higher the likelihood that the company may experience cash flow issues.
The list below illustrates how certain industries operate differently in terms of their payment collection practices. If considering an entrance into one of the industries listed below, entrepreneurs have to pay special attention to cash flow levels and might review collection processes to ensure they have in place appropriate controls.
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