Given the price of new capital, no company can afford to waste its existing capital. However, some businesses are unaware of the amount of trapped cash on their own balance sheets.
By optimizing their working capital, freeing up this cash provides benefits beyond enhanced operational efficiency.
In addition, it provides companies with the additional liquidity they need to finance growth, reduce debt levels, reduce costs, maximize shareholder returns, and even outperform their competitors.
While we can find numerous ways to free up working capital, the primary focus of this article is on one fundamental strategy, that is, accounts receivable. Accounts receivable management is one of the most effective ways to establish a sustainable cash flow for your business.
So, in this article, let us list 7 Ways to Rescue Your AR Department From the Cash Flow.
Overview
A recent survey by the U.S. Bank found that poor cash flow management or a lack of understanding of cash flow contributes to the failure of small businesses 82 percent of the time.
When to bill, how much to bill, and when to collect is governed by formal accounts receivable policies in the majority of businesses. Sadly, not all businesses implement these policies effectively or even adopt the correct procedures. It frequently boils down to culture. Businesses that place a premium on sales frequently fall into the trap of extending credit to customers, 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 financing unintentionally.
Some may argue that this is unimportant, but the reality is far more complex. If a business must borrow money to meet its obligations because its customers are paying late, it may incur losses on the financing charges alone.
Even if this is not the case, a cost is associated with carrying overdue accounts receivable. It places your cash flow on a tightrope. Your money is tied down on your balance sheet, preventing you from investing in growth opportunities, increasing shareholder payouts, purchasing new equipment, or introducing new products.
Why is it Important to Reduce the Accounts Receivable Department?
You may not immediately recognize the benefits of proactively optimizing your accounts receivable department, as do many business owners. As stated previously, doing so can significantly improve numerous aspects of your business.
It prevents cash flow from being wasted, thereby increasing liquidity. In turn, a company is better able to reduce debt, cut costs, fund expansion, and in many cases, outperform the competition.
An essential aspect of optimizing accounts receivable processes is initiating them early. Too frequently, businesses are so intent on making sales that they disregard accounts receivable. Beginning the process early necessitates discussing payment terms in the earliest stages of the client relationship.
Getting a new customer on board early 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 an early process priority.
Optimization of the accounts receivable department is essential for liquidity management. Effective management of accounts receivable aids in avoiding cash shortages. Giving customers credit invites additional expense in the form of opportunity cost, which is the cost of forgoing the next best alternative.
If funds are trapped in receivables, businesses may miss out on the chance to invest them in alternative sources and earn higher returns.
Therefore, developing strategies for optimizing receivables is essential to prevent funds from becoming trapped in the accounts receivable department for an extended period of time.
Due to an already sluggish economy, declining revenues, and the ongoing effects of the COVID-19 pandemic, it is much more important now than before to take this action.
Here are a few steps you can take to ensure that your business operates smoothly by reducing the accounts receivable department.
7 Ways to Rescue Your AR Department From the Cash Flow
1. Automatize Account Receivable
Tracking payments manually or in a spreadsheet increases the likelihood of something being overlooked and causes additional work. In addition, it may create different choices in your accounts receivable department.
Thankfully, numerous applications automate the process of keeping track of accounts receivable. These applications facilitate the creation and transmission of invoices and can notify you when a payment is past due.
Numerous 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-out Invensis’s Accounts Receivable services and maximize the cash generated by your company’s accounts receivable process.
2. Negotiate Your Payables
During a cash flow process, delaying or reducing the amount of cash flowing out of your company will help reduce the strain on your working capital. When negotiating payments with your vendors or inquiring about delaying payments, it is important to be forthright.
Although some may be unwilling to budge, loyal vendors will likely be flexible and willing to work with you during an emergency. You may also be eligible for flexibility or even a reduced obligation from your utility providers.
3. Establish an Effective Billing Process
In order to be effective, billing and invoicing customers must be accurate and streamlined. Errors in pricing, units of measurement, and similar areas can wreak havoc.
In addition, invoices must be created and sent promptly, and their production must be consistent and well-defined. Billing and invoicing can be improved by automating as much as possible, reducing the AR department’s involvement.
So don’t be afraid to use technology. Utilize exception reports to identify troublesome accounts. If possible, create a customer portal to delegate some work to customers and give them a sense of independence.
4. Utilize a Collections Company
Utilizing a collections agency is typically the last thing when dealing with customers who are chronically delinquent with their payments. Depending on the situation’s specifics, it may be preferable first to offer a payment plan or charge interest. Nonetheless, a collections agency can save you time and energy that would be better spent on your business.
According to studies, one in four small businesses have trouble managing their accounts receivable due to customers who don’t pay the full amount, pay beyond the terms established, or don’t pay at all.
5. Maintain Accurate Customer Data
Centralizing the controller data process to ensure the accuracy of customer accounts and information is essential for establishing and sustaining an efficient accounts receivable process. For instance, incorrect addresses can lead to invoices being sent to the wrong location, resulting in late payments.
Customers’ accounts should be routinely inspected for anomalies such as unusual or inappropriate payment terms, credit limits, and discounts.
Changes to customer data should be appropriately documented, and controls should be implemented to prevent unauthorized users from accessing or editing data.
6. Optimize the Collection Procedure
For example, when payments are properly applied, it is straightforward to determine which accounts are at risk of defaulting.
The collection process should be organized and consistent. Establishing a clearly defined procedure for negotiating payment plans will ensure that it aligns with the organization’s overall goals.
As much as possible, processes should be automated to minimize the risk of manual entry errors done by the accounts receivable department.
7. Application procedure for cash
When customers pay their bills, the second source of difficulty emerges. As payments are received, they must be applied to the appropriate customers and the specific customer invoices they pertain to. And this must be done promptly so that you always know which accounts are current and which are past due.
Otherwise, it is impossible to determine which customers have paid which invoices, making payment collection a nightmare.
Companies that make this error waste a substantial amount of time and resources reissuing invoices and modifying reconciliation reports when their systems cannot “reverse” incorrect cash applications.
To avoid this, you must assign payments to specific invoices as opposed to simply crediting the customer’s account.
Apply payments to the appropriate invoices, not just the oldest invoices, and avoid crediting the customer’s account with payments.
Conclusion
A healthy cash flow is the result of smooth and efficient operations. So implementing some or all of the 7 ways mentioned above should help you increase your business’s cash flow. You’ll also need to make sure you’re making the right marketing, customer service, product or service development, and customer acquisition decisions.
To reduce your accounts receivable department, it is not necessary to begin from scratch. You can choose to tackle one section at a time or make sweeping 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 peers, competitors, and best practices in your industry. Then, you can determine the necessary steps to close the gaps.
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