Given the price of new capital, no business can afford to waste its existing capital. However, some companies are unaware of the amount of cash trapped on their own balance sheets.
By optimizing their working capital, freeing up this cash offers benefits beyond improving operational efficiency.
Additionally, it provides companies with the additional liquidity they need to fund growth, reduce debt levels, lower costs, maximize shareholder returns, and even outperform their competitors.
While we can find many ways to free up working capital, this article focuses primarily on one fundamental strategy, which is accounts receivable. Managing accounts receivable is one of the most effective ways to establish sustainable cash flow for your business.
So, in this article, let’s list 7 ways to save your AR service from cash flow.
A recent US Bank survey found that poor cash flow management or a lack of cash flow understanding contributes to small business failure 82% of the time.
When to invoice, how much to charge, and when to collect are governed by formal Accounts Receivable policies at most companies. Unfortunately, not all companies implement these policies effectively or even adopt the correct procedures. It often comes down to culture. Businesses that give a sales bonus often fall into the trap of extending customer credit, offering discounts, or ignoring payment terms in order to acquire new customers. However, no one will focus on working capital if management does not.
The result? You end up providing customers with free funding unintentionally.
Some will say it doesn’t matter, but the reality is much more complex. If a business has to borrow money to meet its obligations because its customers pay late, it may incur losses solely on financing costs.
Even if this is not the case, there is a cost associated with maintaining delinquent accounts receivable. It puts your cash flow on a tightrope. Your money is tied up on your balance sheet, preventing you from investing in growth opportunities, increasing shareholder payouts, buying new equipment or introducing new products.
Why is it important to reduce accounts receivable service?
You may not immediately recognize the benefits of proactively optimizing your accounts receivable department, as many business owners do. As stated earlier, this can dramatically improve many aspects of your business.
It prevents waste of cash flow, thereby increasing liquidity. In turn, a business is better able to reduce debt, cut costs, finance expansion, and in many cases outperform the competition.
A critical aspect of optimizing accounts receivable processes is getting them started early. Too often, companies are so determined to make sales that they ignore accounts receivable. Starting the process early requires discussing payment terms in the early stages of the customer relationship.
Onboarding a new customer quickly with electronic payments is another example of a proactive approach to the situation.
Before taking any other action, your company should commit to making accounts receivable a priority of the early process.
Optimizing accounts receivable service is essential for cash management. Effective management of accounts receivable helps avoid cash shortages. Extending credit to customers incurs additional expense in the form of an opportunity cost, which is the cost of giving up the next best alternative.
If funds are trapped in receivables, companies may miss the opportunity to invest them in other sources and earn higher returns.
Therefore, developing strategies for optimizing accounts receivable is essential to prevent funds from being trapped in servicing accounts receivable for an extended period of time.
Due to an already sluggish economy, declining incomes and the continuing effects of the COVID-19 pandemic, it is much more important now than before to take this action.
Here are some steps you can take to keep your business running smoothly by reducing accounts receivable service.
7 Ways to Save Your AR Department from Cash Flow
1. Automate the customer account
Tracking payments manually or in a spreadsheet increases the likelihood of something being overlooked and causing additional work. Additionally, it can create different choices in your accounts receivable department.
Fortunately, many apps automate the process of tracking customer accounts. These apps make it easy to create and submit invoices and can notify you when a payment is overdue.
Many other factors contribute to the success of your business, but these tips for managing your accounts receivable will help you maintain a steady cash flow. Try Invensis’ Accounts Receivable Services and maximize the cash generated from your company’s Accounts Receivable process.
2. Negotiate your debts
During a cash flow process, delaying or reducing the amount of cash flowing out of your business will help reduce pressure on your working capital. When negotiating payments with your vendors or asking for late payments, it’s important to be upfront.
Although some may not want to budge, loyal vendors will likely be flexible and willing to work with you in an emergency. You may also benefit from flexibility or even reduced obligation from your utility providers.
3. Establish an effective invoicing process
To be effective, billing and customer billing must be accurate and streamlined. Mistakes in pricing, units of measurement, and the like can take their toll.
In addition, invoices must be created and sent quickly, and their production must be consistent and well defined. Billing and invoicing can be improved by automating as much as possible, reducing AR department involvement.
So don’t be afraid to use technology. Use exception reports to identify problematic accounts. If possible, create a client portal to delegate some of the work to clients and give them a sense of independence.
4. Use a collection company
Using a collection agency is usually the last thing to do when dealing with chronically late payment clients. Depending on the specifics of the situation, it may be best to first offer a payment plan or charge interest. Nevertheless, a collection agency can save you time and energy that would be better spent on your business.
According to studies, one in four small businesses struggles to manage their accounts receivable due to customers not paying the full amount, paying beyond the established terms, or not paying at all.
5. Maintain Accurate Customer Data
Centralizing the processing of controller data to ensure the accuracy of customer accounts and information is essential to establishing and maintaining an effective customer account management process. For example, incorrect addresses can result in invoices being sent to the wrong place, resulting in late payments.
Customer accounts should be regularly inspected for anomalies such as unusual or inappropriate payment terms, credit limits and discounts.
Changes to customer data must be appropriately documented and controls must be implemented to prevent unauthorized users from accessing or modifying the data.
6. Optimize the collection procedure
For example, when payments are applied correctly, it is easy to determine which accounts are at risk of default.
The collection process should be organized and consistent. Establishing a clearly defined procedure for negotiating payment plans will ensure that it aligns with the overall goals of the organization.
As much as possible, processes should be automated to minimize the risk of manual entry errors made by the accounts receivable department.
7. Procedure for requesting money
When customers pay their bills, the second source of difficulty arises. As payments are received, they should be applied to the appropriate customers and the specific customer invoices to which they relate. And it needs to be done quickly so you always know which accounts are open and which are overdue.
Otherwise, it is impossible to determine which customers have paid which bills, making collection a nightmare.
Companies that make this mistake waste a lot of time and resources reissuing invoices and changing reconciliation reports when their systems cannot “undo” incorrect cash applications.
To avoid this, you should assign payments to specific invoices instead of just crediting the customer’s account.
Apply payments to appropriate invoices, not just older invoices, and avoid crediting the customer’s account with payments.
A healthy cash flow is the result of smooth and efficient operations. So, implementing any or all of the 7 methods mentioned above should help you increase your business cash flow. You’ll also need to make sure you’re making the right decisions when it comes to marketing, customer service, product or service development, and customer acquisition.
To reduce your accounts receivable department, you don’t have to start from scratch. You can choose to tackle one section at a time or make drastic changes all at once.
In the long run, any steps you take to reduce your accounts receivable department’s involvement will yield substantial returns.
The process begins with a comprehensive understanding of your current state and a gap analysis to determine how your performance compares to your peers, competitors, and industry best practices. Then you can determine the steps needed to close the gaps.