For a business to be running efficiently, it is important to maintain a positive cash flow. It is one of the most critical factors that fuels the growth of SMBs. Establishing an effective cash management strategy that allows a business to improve its Accounts Receivable will consequently optimise cash flows and help determine the success of the business.
This post will help you understand Accounts Receivable (A/R) and its impact on cash flow as well as highlight some of the key strategies to optimise A/R.
Understanding Accounts Receivable
Simply put, Accounts Receivable (A/R) is the money a business has earned (in exchange for its goods or services) but has not yet received. A positive A/R means a business has more cash for use and provides a clear indicator of a business’s income. For a business, A/R represents money coming into the business and is referred to as an asset. If the figure representing A/R is positive, then the business is said to be profitable, meaning its assets are greater than its liabilities (the money owed by the business).
But this is a simplistic view. Maintaining a positive cash flow involves regular forecasting, tracking Accounts Receivable and adopting robust A/R policies that allow businesses to invest in profitable opportunities.
Below are some of the strategies that can help your business optimise its Accounts Receivable.
Strategies for managing Accounts Receivable
#1 Conduct a credit check
A credit history checktells you if the person you are planning to do business with is reliable in terms of making payments on time. Generally, when using accounting software to make an invoice to a business, you will receive the credit score as calculated by Equifax (a global credit scoring company). A low credit score will help you protect your business by shortening the payment terms or asking for a deposit.
#2 Write down payment terms before you start doing business
A study conducted by Xero revealed that about 60% of invoices sent out by small businesses were late payments. Payment terms define the period a buyer is expected to pay back in and can significantly reduce the number of late payments. These help businesses in taking legal action or charging interest (depending on the terms) and encourage customers to avoid making late payments.
#3 Send your invoices promptly
Speaking of payment terms, it is equally important for businesses to communicate quickly and send out the bill as soon as possible. The clock only starts ticking once the invoice has been sent. Smart businesses are using software that allows them to send invoices on the go via mobile app. This also provides greater flexibility to your customer in terms of paying on the go.
#4 Offer cash-free payment options
Allowing businesses to pay via card, direct debit or services like PayPal can make it easier for your business to get the money into your account faster.
#5 Check your bank account regularly
Managing your A/R effectively also means systematicallychecking your bank accounts for payments until they have been received. Keeping a list of your invoices or using cash flow software such as Float can facilitate this process.
#6 Invest in accounting software
Using good software like MYOB, QuickBooks or Xero for all your accounting needs will help you not only run your business efficiently but will also allow you to focus more on improving customer experience. While these software solutions are great for invoicing and bookkeeping, Float will help your business with cash flow forecasting. Float provides a seamless integration with your accounting software and updates data every 24 hours as you create and make changes to your invoices, reducing the chance of human error.
#7 Create a plan for debtors
From sending a reminder via email to making phone calls or sending out invoices for payments that are overdue, businesses need a plan to deal with debtors. According to a report published by Deloitte, having a robust accounting process, negotiating payment plans based on the business’s collection policies and automating processes are some of the ways of improving A/R.
#8 Improve credit control
One easy way of doing this is by using Chaser debtor-tracking software. Chaser not only integrates with Xero but also provides your business with insights into your customers (from who to grant credit to and who not to). By automating this process, businesses can save up to 7.3 hours on credit control each week.
Here’s what Doug Glass of Milbank Architects had to say:
“We subscribed after failing to get a response from clients and literally within 10 mins of using Chaser we received two emails from hard-to-contact clients apologising and advising payments were on the way. We would certainly recommend Chaser to anyone wishing to maintain a healthy cash flow.”