Cash flow is the capital that you receive and that which has to be paid by you. It’s the sum total of the inflow and outflow of cash, the inflow must be equal to or greater than the outflow to avoid a negative cash flow. To make sure your net cash flow is in your favor, you need to make sure your overdue payments are managed timely.
This is where account receivable management comes into the picture. AR is an asset account; when you sell goods or services and you are yet to receive the payment for it. Account receivable can be rewarding only if you know the tricks of the trade; here is where we come in, let’s learn how AR can be managed effectively for the financial stability of your business.
If done right, AR management can improve your net cash flow.
How to Improve Your Cash Flow Using Account Receivables;
- Effective Billing Process Numerous businesses negatively affect themselves by sending poorly done invoices. To ensure the effectiveness of your billing process keep billing structure and payment terms precise and short. Your billing and collection should have accurate customer data that highlights their payment terms, email addresses, credit limits, payment timeline, etc. As soon as an order is fulfilled, issue invoices immediately and in an accurate manner. The invoices you send should include terms and conditions that are easy to understand. Make it a point to send invoices via email and ask for confirmation to eliminate the chances of any foreseeable issues and delays.
- Easy Payment Process Offer a wide variety of payment options; including cash, credit and debit cards, cheque, online money transfers, and digital payments. To ensure that delivery time is reduced and your customers are able to download invoices directly, use an electronic billing system that generates e-invoices.
- Customer Segmentation via Analytics It is essential to identify clients based on their previous payment patterns. Data analytics is a great tool that can be utilized to classify customers into micro-segments based on their credit scores and history. These categories range from “true-low risk” to “unable to cure”. When you have your customers divided into categories, you can then apply a custom strategy that is efficient respectively. Customer segmentation helps you avoid defaulters and bad debts.
- Stringent Credit Policies For an effective AR management system, your policy for invoicing must be carefully curated. Create an extensive plan where terms are strict and standards are followed; include policies for payment, who can get credit and who won’t, how much credit is to be issued, contract periods, discount rates, dispute resolution procedures, strategies to deal with defaulters. Curate a policy and also ensure it is followed rigorously.
- Create an AR Ageing Report Tracking payments is by far one of the most important steps in account receivable management. This needs to be done meticulously. The use of software and apps is the smartest way to go about it to avoid any mistakes, however, Excel spreadsheets can also be used. We recommend utilizing software programs as it eliminates the chances of human error. Reassessing your collection strategies by calculating ART- Account Receivable Turnover helps keep your company’s collection efficiency in check. A high ratio of ART is an indicator of efficiency while a low ART ratio means the collection strategies need to be revised.
- Regular View of Credit Limits Audit of your master data, AR process, and credit terms need to be a regular practice. This is essential to identify businesses that are slow-paying or customers who have alarming credit limits. A diverse range of indicators can be utilized to assess risk; these include past-due accounts, trade references, liens, legal judgments, financial statements, business credit scores, and ratings. If your audit results indicate risk, revisit your strategies, see where the problem lies and alter course where necessary.
- Automation of your AR Processes Let’s see how automation can help in reducing risks for your AR process. Automation of your AR processes gives you the luxury of developing key performance indicators to keep tabs on your overall collection scheme, it saves time and eliminates any human errors. Using automated invoicing processes leads to faster payment times. Automation can be used to auto-generate invoices on the basis of triggers, tally receipts in the accounting system or manage credit and collection activities.
Why Use AR Management Professionals For More Success
Skip-Tracing; they use specialized tools to locate Using special tools to locate untraceable customers.
Omni-Channel CRM; offers the ability to orchestrate customer engagement across multiple channels.
Offering online payment options; when multiple payment options are given, it is more likely that the customer will pay within the given timeframe.
Divide customers into segments; prioritizing accounts on their ability and likelihood to pay as they divide customers into segments based on their credit scores and history, using advanced analytics.
Highly trained staff; they have staff that is highly trained and know exactly how to deal with a customer based on their history and score.
Research Before Choosing A Professional Business Solutions Partner
Unless a business specializes in collecting AR, partnering with BPO companies is a more effective tactic. Before you choose a partner, ensure that they have the capacity to cater to your company’s unique needs. What you need to look for is their past experience with other companies, if they offer scalable solutions that can be tailored according to your varying needs, whether they are using an automated system, and what kind. If they check all the necessary boxes, outsource, because based on a recent study by U.S Bank, 82% (https://preferredcfo.com/cash-flow-reason-small-businesses-fail/ ) of businesses fail due to poor cash flow management skills or poor understanding of cash flow