Cash flow is often described as the lifeblood of any business. Before there can be any cash flow, however, there must be accounts receivable. Think of A/R as the doorway to cash flow. Without any customers being billed and money collected, debt-free money can’t come into the business.
That isn’t the end of the story for accounts receivable. In order for cash flow steadily to grease the daily operations of a business, accounts receivable needs to run like a well-oiled machine. This means any business that wants predictable cash flow needs to have great accounts receivable management. In this article, we share a few tips on how to ensure your accounts receivable keeps chugging along without skipping a beat.
Define Your (Entire) Process
There are many moving parts in accounts receivable. When things go wrong, you’ll want to know what to do. Trying to figure out solutions on the fly can mean log-jamming the entire operation. Rather than just defining the process of issuing invoices and collecting payments, build in contingencies. Consider the following:
Have at least two people available who know how to run A/R completely.
When a company can’t pay its invoice, have a payment plan ready to go.
Know when to offer customers better terms.
Define when billing reminders should be sent.
Display all available forms of payment acceptance on each invoice.
Create a guide that clearly outlines the A/R process for employees.
In the beginning, you can’t cover every scenario that can go wrong. But you can cover some of the most common ones. As you process more invoices, you’ll run into additional scenarios. These should become part of your A/R process. Employees should be familiar with how to handle each scenario.
Not all customers are created the same. Some will always pay on time while others will start out paying on time and then start missing payments. It’s difficult to know when or if a customer will go from an A+ rating to payment risk.
Every customer should go through a thorough background check to determine creditworthiness. How thorough these checks are will depend on the customer. If a customer is well-known throughout the industry and you’ve verified that it pays on time, verification might not be as intensive. You’ll still want to verify each customer and come to your own conclusion.
For lesser known or new companies, trial periods can work well. This means having the customer pay in cash or extend only a small amount of credit to it. The technique is meant to reduce payment risk until the customer can establish a payment history with you. Maybe after three months or a certain volume of transactions, the customer moves off the trial.
For customers that have a great payment history, at some point you might consider extending better credit terms. These terms can go beyond the industry average, which will create a competitive advantage for your company. Continuing to extend terms likely doesn’t offer much benefit. While additional customer loyalty might be built, company cash flow will suffer. A single increase in terms that goes above the industry average rewards the customer and builds additional loyalty without the continued degradation in cash flow that an open-ended improvement in terms will have.
If you haven’t yet gone digital, you’ll have a more difficult time improving your A/R process. With a digitally-based process, you can more easily perform analysis.
There are plenty of ways to get started with software that can improve your A/R. Most any accounting software, such as Quickbooks or Freshbooks, is a great place to start. These software programs provide built-in analysis. At a glimpse, you’ll be able to see the number of outstanding invoices, amounts, and the number of overdue invoices. You can pull up reports that show who always pays on-time or even early. You’ll be able to see how many customers you’re invoicing per month along with the average days outstanding. These insights allow for better cash flow management since you’ll have more accurate predictions on cash coming into the company.
All of the analysis available in software packages helps you to make decisions about who should get better payment terms, discounts, or even who should go back into a trial payment period because of late payments.
To automate A/R, going digital is a prerequisite. Automated A/R requires different software from the accounting software you might be using. Before selecting any new software for A/R automation, check that it integrates with your accounting software. Many do integrate with accounting programs. This level of integration with your accounting system will make life a lot simpler than having to manage two different software packages.
A/R automation takes the manual, repetitive process of creating invoices, sending them, sending reminders, and collecting payments and turns it into a workflow that is managed by software. This can help cut labor cost or at least allow your employees to do more.
Because the process is still digital, you’ll have access to analytics showing the performance of your A/R.
Improving your accounts receivable management means improving your company’s efficiency. It allows you to make better predictions about future performance, which can mean better capital expenditures and project investments.