Accounts receivable conversions are essential to the financial health of any business because otherwise, these paper promises-to-pay remain just that--paper. Extension of credit in the form of invoices, or accounts receivable, is a must for businesses that want to attract and keep customers, especially new customers who help the business to grow. Providing credit is an expected part of doing business, and any business that demanded cash for every transaction would soon lose its customers to competitors.

Invoices are paper that represent cash owed to a business, but unless that invoice is paid and that paper converted into cash, the business is in the hole for the face value of the invoice. This is the predicament facing small businesses: they must extend credit, they cannot afford not to collect on that credit, but they cannot count on converting that credit into cash. Cash is the lifeblood of any business, but it is a matter of survival for small businesses.

When Conversions Fail

Businesses commonly fail to control their accounts receivable for many reasons. Either they do not have clear credit policies, or do not enforce them. They may not investigate the credit history of a customer before offering credit, or they may let accounts grow too large.

Whatever the reason, the result is the same, if the situation is not turned around. The business will fail unless the cash flow is revitalized. Few business people have the time or the training to be effective bill collectors, so the business continues to be crippled by lack of cash. These are ideal circumstances in which to consider factoring, which provides immediate cash advances for those invoices.