Upgrading Your Accounts Receivable ─ A Cash Flow Booster for Small Businesses

As a business owner, you know the sleepless nights and headaches unpaid invoices can cause. They are time-consuming, costly, and interfere with the cash flow of your business. Every business owner must incorporate an accounts receivable management system to avoid these costs.

Most business owners have an accounts receivable policy that states when to invoice and collect payments. However, this process in itself can sometimes be a struggle.

Cash flow is the key to unlocking the success of your business. With uncertainty and global inflation, managing your cash flow will determine the survival of your business.

In this article, we look at common challenges business owners face when dealing with accounts receivable management. Also, we will list some of the effective strategies for implementing this system.

Let’s dive in.

Common Bottlenecks in Accounts Receivable Management

“Money is a little bit tight right now, but we will pay you next week”.

Above is a popular phrase that most customers tell business owners when pushed about unpaid invoices. And these words can be annoying.

Statistics show that 90% of Australian businesses struggle with cash flow challenges. So, what are some of these challenges?

Delays in Invoice Processing

When it comes to the collection of payments, most businesses have yet to have a centralised or automated system. They do this manually, which is time-consuming and prone to human errors.

The time spent reminding a customer of an unpaid invoice drastically reduces the chances of prompt payments. Studies show that businesses that use manual processes take 30% longer to follow up on outstanding invoices than those that use automation. Also, the manual process can lead to missed business opportunities.

Businesses depend on paid invoices. If payment collection is inconsistent, it results in invoice processing delays which then interferes with the cash flow.

Inefficient Tracking of Outstanding Amounts

Using manual processes to follow up on payments can overwhelm your staff and harm your business. It can lead to poor communication, errors, and disputes. But the biggest hurdle with manual processes is tracking them.

It’s nearly impossible to follow all the outstanding amounts manually. There’s no visible clarity of money owed, by whom, and when payment is expected. And this interferes with cash flow.

Inefficient tracking could mean your staff focuses on important cases first, translating into money lying around because it doesn’t seem a priority. Yet, in business, all money counts.

With no clear visibility about outstanding amounts, your finance personnel could find themselves asking for payments from customers who have already paid. This is a waste of time and can lead to customer disputes and frustration.

Lack of Proactive Communication with Clients

Customer experience forms a considerable part of the accounts receivable processes. One of the pillars of a good customer experience is excellent communication. If you lack a proactive communication channel, you’ll struggle with communicating about payment reminders and other important information.

Customers who have to deal with poor communication will likely struggle to make timely payments. Also, poor communication can lead to disputes.

Studies show that 80% of Australian businesses have lost business opportunities because of poor communication in the payment processes. Most accounts receivable departments are still stuck on traditional communication channels like emails. Some of these correspondences can get lost in inboxes. And will not be attended to with the urgency they deserve.

Poor communication leads to poor customer relationships and delayed payments. In the end, this interferes with your business cash flow.

Effective Strategies for Accounts Receivable Management

To solve the above challenges and ensure your business thrives with consistent cash flow, try these strategies:

Implement a Stringent Credit Policy

Before giving credit to your customers, ensure that you have a signed credit policy. The policy should clearly state credit procedures and the consequences of a breached agreement.

As a business owner, you must conduct a credit assessment of your customers before giving credit. A detailed assessment will tell you their financial history and track record when it comes to payments.

Your credit policy should enable you to take proactive action on overdue invoices. By doing this, it will help you strengthen the effectiveness of the accounts receivable and keep your cash flow consistent.

You must regularly review your credit policy to keep up with the changing economic times.

Automation in Invoicing and Reminders

The manual process of going after clients, urging them to make payments or sending reminders is exhausting and time-consuming. To make this process easy, automate your invoicing and reminders.

Automating your processes will save you and your customers time and costs. It also eliminates human error and conflicts and monitors payments. It then creates efficiency in your accounts receivable process, keeping your cash flow stable.

Offering Early Payment Discounts and Incentives

Early payment discounts will prompt your customers to pay early before the due date. Most businesses give a 5% discount to their customers if they pay on or before the due date.

You can choose the positive or negative way when it comes to incentives.

Positive incentives include offering lower fees, personalised gifts, or customer support to customers who make early payments. Negative incentives include charging interest or more fees or limiting access to a particular service or product.

Whether you use positive or negative incentives, the goal is to get paid. However, negative incentives tend to destroy the relationship with your customers. Use it as a last resort.

Monitoring and Evaluating Receivable Performance

To keep your cash flow consistent and your business thriving regardless of the changing economic times, you must regularly monitor and evaluate your accounts receivable processes.

These tips will help you monitor your receivable performance:

Regularly Reviewing Debtor Ageing Reports

Before initiating payment collection procedures, you should first know the current payment position of all your accounts receivable. And the ageing report does this. It tracks all the payment statuses and lists the amount due.

The ageing report should be continuously reviewed and updated to eliminate conflicts before the due date.

Setting and Monitoring KPIs for Receivables

To keep your cash flow healthy and consistent, you must develop and track receivable performance metrics. Some of the KPIs to keep in mind include the Average Days Delinquent (ADD), Days Sales Outstanding (DSO), turnover ratio, Collection Effectiveness Index (CEI) and revised invoices.

Once your accounts receivable have metrics in place, keep the information in one place, allowing your finance team to detect any problems and sort them promptly.

In any business, customer relationships are important. But so is getting paid. Continuously monitor and evaluate your metrics to ensure the success of your business.

Continuous Feedback and Policy Iteration

An effective system is constantly improved to meet the needs of its customers. Regularly ask for customer feedback about their experience and areas you can improve.

If your business has options for your customers to choose from, you can implement the policy iteration strategy. Put in one place all these options into one updated operation.

Conclusion

Accounts receivable is one of the crucial aspects of your business. It helps maintain a consistent workflow and working capital, ensuring your business thrives. If you need help maintaining your accounts receivable, talk to a professional bookkeeper about how they can help.