Managing accounts receivable is one of the most effective and efficient ways to encourage positive cash flow in a business.
“Uncollected receivables are the main reason business owners are making money but don't have any money on hand," says Brock Blake, CEO and founder of South Jordan, Utah-based small-business lending marketplace Lendio.
“As a business owner, it's critical to take some time to look closely at your receivables," Blake says.
“The management of accounts receivable, inventory and accounts payable is the least expensive way to manage cash flow," adds Laurie Jamison, senior treasury services officer for Allegacy Federal Credit Union in Winston-Salem, North Carolina. “A/R should be monitored closely and actions should be taken to improve the collection of this asset."
In addition to its effect on finances, the way a company handles its accounts receivable also has an influence on customer relationships.
“All aspects of this process should be sure to support the organization's customer service, experience, quality and branding goals," Rachele Collins, a researcher at APQC, a Houston nonprofit that provides benchmarks and best practices for process and performance improvement.
Managing Accounts Receivable for Positive Cash Flow
A solid starting step for businesses that want to improve positive cash flow is to analyze reasons for late pays. This can start with:
● examining benchmarks for similar companies and
● looking at key performance indicators such as days sales outstanding, number of invoices processed per employee and cost for processing each invoice.
“We advise a company to look at their own industry and then outside their industry to see what's possible," Collins suggests.
Offering a discount for early payment or offering a credit card payment option, might cut into the overall revenue of a transaction, but if they help the cash flow of your business, they are almost always worth it.
—Brock Blake, CEO and founder, Lendio
Next, it can be useful to talk to customers and find out their preferences and abilities when it comes to paying on time.
“Think to yourself, what can I do to make it easier for customers to pay me?" Blake suggests.
Automation coupled with standardizing invoice data used in sales, accounting and logistics departments also can boost positive cash flow. A couple of ways you can reliably cut costs, improve speed and reduce time-wasting errors when processing accounts receivable are:
● automatically generating invoices when goods are shipped
● using electronic invoices and
● having customers enter their own information in invoicing platforms.
“Every time you rekey, you interject the chance of error," notes Steve Player, senior research fellow at APQC.
Encouraging customers to pay electronically is another way to manage accounts receivable for positive cash flow.
“Creating a way for your customers to pay electronically is a must," Blake says.
Paying for Cash Flow
Businesses may have to spend money to improve cash flow. Automated systems, employee training and other components of improved accounts receivables management can require significant investments.
Accounts receivable financing can give businesses quicker access to working capitalwithout having to wait for customers to pay, at the cost of paying interest and fees.
“In some cases a business may decide to offer discounts in order to receive payments in more quickly," Jamison adds.
Blake encourages business owners to regard spending to improve accounts receivable more like an investment rather than a cost.
“Some of these practices, like offering a discount for early payment or offering a credit card payment option, might cut into the overall revenue of a transaction, but if they help the cash flow of your business, they are almost always worth it," he says.
Not all potential drawbacks are financial. Making changes to accounts receivable may cause employees to become frustrated.
“One of the biggest risks, especially when it comes to automation, is fear of change," Collins says.
She suggests mitigating this risk by communicating extensively with accounts receivable and invoicing employees. Specifically, she suggests seeking employee input on changes, offering rewards and recognition for compliance and providing training and appropriate performance measurement.
Finally, changing accounts receivable policies and practices can annoy customers if not handled sensitively.
“Make sure you are helping your customers feel comfortable and at ease with payment terms from the get-go," Blake says. “If any of these tactics make your customers uncomfortable, they could do more harm than good."
Future Accounts Receivable Management
Use of tools such as invoicing portals, electronic invoicing and electronic payments is helping to make accounts receivable management faster, smoother and less error-prone today than ever before.
Collins says widespread use of Robotic Process Automation, a technology employing artificial intelligence and software robots to handle business processes including invoicing and accounts receivable, may be next.
Before change can occur, however, business owners have to see the value in managing accounts receivable and be willing to invest the time, effort and money to improve cash flow.
“In many cases they're too busy trying to get the work done to apply themselves to something like this," APQC's Player says. “But every added days sales outstanding means you have to finance your inventory and employees' salaries. It impacts the bottom line if you're not collecting fast enough."
Read more articles on accounts receivable payable.
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