Accounts Receivable Management: Tweaks to Help Boost Cash Flow

Accounts receivable management may help you identify issues and get invoices paid in full and on time, providing the cash flow your business needs to grow.
March 28, 2016

The hardest part of selling may not be closing the deal; it could be getting paid on time. You probably need the cash that comes in from customer payments to keep your business running. Any delays can cause serious problems, and persistent delays can lead to the failure of your business.

That’s why accounts receivable management can be so important. While businesses don’t necessarily fail because of a lack of profits, they may fail because they don’t have enough cash when the bills are due. You probably don’t need to spend a fortune on software or hire a team of accounting specialists to make sure your invoices are paid. Closely managing your accounts receivable may help boost the number of invoices that are paid in full and on time, giving your business the cash it needs to grow.

Measuring the performance of your accounts receivable is the first step toward understanding what is actually taking place with your customer payments. Once you know what’s going on, you can take steps to improve it. There are certain Key Performance Indicators (KPIs) that alert you to flaws in how you handle collecting cash from customers. Even a simple MS Excel sheet is a good way to start if you don’t have software in place to generate these statistics.

You can start by measuring:

Accounts receivable aging.

This is a simple table that organizes the money owed to you by customers by the amount of time the money has been owed. Usually you measure it in days starting with the date an invoice was sent. This table then breaks it down into 30-day groups. In the U.S., over 46 percent of invoices are still outstanding past the due date. If nearly half of your customer payments are not coming in on time, this can be a serious problem, but it likely won’t be detected without this table.

Payment discounts.

Sometimes companies offer a small discount to their customers if they pay their invoice on time or even early. Unfortunately, many times companies may find themselves in a position where they're forced to offer an unplanned discount to a customer just to get them to pay. Companies facing a cash shortfall many times may make a desperate call to an important customer, leaving cash and profit margin at the table. It’s important to track both planned and unplanned discounts to identify patterns and eliminate the latter type of discount.

Accounts receivable performance per customer and by salesperson.

Managing cash flow successfully can be based on identifying patterns. Can you spot the problems before they become too big to handle? As part of your A/R analysis, consider analyzing outstanding invoices by customer and by salesperson. Are certain customers consistently paying late? Is there a particular salesperson who seems to to always offer customers discounts that seem a bit too generous? Or are there particular salespeople whose customers always pay on time? Are there lessons they can provide to the rest of your sales team? It’s amazing how much you can learn about your business just be analyzing your accounts receivable.

Accounts receivable versus other payment methods.

About 51 percent of domestic business to business sales transactions and 46 percent of export sales are done via payment terms, which means they form part of your accounts receivable. The reason why you offer any payment method other than cash is to presumably win larger contracts or secure new customers. Is this actually working out? Take a closer look at your invoices, breaking them down by payment method, size and profitability. Are the contracts where you offer payment terms larger or more profitable than those paid by cash, wire transfer or credit card? Is your business seeing any benefits from offering payment terms? The answer should be yes.

Read more articles about accounts receivable/payable.

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