In a dynamic business world, it is important to maintain a steady flow of funds to ensure the healthy growth of an organization. One of the key game changers is effective accounts receivable management. However, let us understand how exactly the right AR management helps you get improved working capital and what challenges you may face in optimizing it.
Accounts Receivable Management
Simply put, accounts receivable management is the process by which your company ensures customers pay for the goods or services they buy from you as quickly and efficiently as possible. It entails keeping track of the alleged balance due from each client, reminding them to pay on time, and receiving the funds in your bank when expected. Efficiently done, AR can really help increase your working capital.
Why is the Working Capital Important?
Working capital refers to the difference between the current assets and the current liabilities of a company. A positive working capital suggests that a company can pay its short-term obligations and spend money on its operations, and this is what one needs for the smooth running of businesses and cash management. Efficient working capital management means a firm can comfortably meet its liabilities, run its activities, and not experience any financial crisis.
Basically, working capital is the lifeblood of any business. It fuels each of its gears, right from covering payroll to purchasing inventory. A business with a high degree of A/R management can predictably count on cash flow, enabling the company to plan and invest in growth opportunities.
Here’s how:
- Improved Cash Flow: Efficient collection of receivables means more certain cash flow, which necessarily reduces borrowing and its interest cost.
- Increased Liquidity: More liquid assets mean your business can capitalize rapidly on market opportunities and meet emergency cash needs.
- Improved Financial Planning: A good forecast of cash inflows helps you make informed decisions on how much to spend, invest, and finance through debt.
Accounts Receivables Management – Challenges and Solutions
Management of A/R is never a problem-free task. Mentioned below are some of the common challenges that a firm often faces while managing ARs:
- Late Payments: Late customer payments can cause cash flow issues.
- Credit Risk: Credit extended to customers includes the risk that customers may not pay it back.
- Wrong Invoicing: Incorrect invoices can result in payment delays and jeopardize customer goodwill.
- No Follow-up: The lack of a systematic follow-up system can result in not-soon-noticing overdue accounts and, eventually, bad debts.
Strategies to follow to manage A/R
Now that we have identified the problems, here are some practical pointers to be followed to manage your A/R effectively and in the process ensure that your working capital is optimized:
- Credit Policies: Formulate credit policies in black and white. Before you give credit, try to judge the creditworthiness of a new customer and set credit limits for them.
- Accurate Invoicing: Send out detailed and accurate invoices on time. This will help avoid disputes and delays in payments.
- Automated Systems: Purchase the automated management system for your accounts receivable. Automation monitors the due dates, sends reminders, and even generates reports, thus making the whole process more productive.
- Regular Follow-ups: Adopt the practice of follow-up for accounts whose payment is overdue. Using reminders and repeated emails can help a lot in this regard.
- Customer Relations: Develop good relations with your customers. Open communication can solve the problem quickly and help in continuing a healthy business relationship.
- Staff Training: Train your staff on A/R management practices. A knowledgeable staff will better handle problems and maintain accuracy in records.
- Track Metrics: Keep an eye on KPIs such as DSO (Days Sales Outstanding) and the aging of receivables, which will help one understand the effectiveness of one’s accounts receivable and bring attention to shortcomings that still need to be improved.
How A/R Process Can Help in Better Cash Flow
Let’s take an instance to understand how an efficient A/R process can be helpful to organizations to have optimum cash flow. One of our clients faced a working capital issue despite steady revenue growth. The average period for its A/R cycle had extended to 45 days. Thereby, a large piece of its working capital had been held up in unpaid invoices. This, in turn, hampered its chances of reinvesting in talent acquisition and marketing efforts to drive further growth.
To overcome this challenge, they partnered with Outsourcing Business Solutions to manage their Accounts Receivable Process. We implemented an end-to-end A/R management solution that included:
- Automated Invoicing: This replaced manual efforts of preparing and sending invoices to clients, ensuring that invoices reached clients on time and were accurate, thereby accelerating the billing cycle.
- Improved Credit Control: Tighter creditworthiness assessments of new clients and changes to the existing credit limits significantly curbed the risk associated with bad debt.
- Accurate Application of Funds: AR management ensured that all the A/R were correctly applied by tracking and reconciling payments received under outstanding invoices, which thereby provided the business with optimized cash flow and financial transparency.
- Regular AR Aging Report: Timely reporting of aging by categorizing invoices based on their due dates, allowing businesses to monitor payment timelines effectively. Regular detection of potential delinquent accounts, thereby enabling the business to make appropriate collection efforts and reduce the possibility of bad debts.
As a result, the A/R cycle was reduced to 33 days from 45 days, which was an improvement to the company’s cash flow and overall working capital. Cash applications were accurate, due to which a clean and accurate view of AR aging was available to the client.
Are you looking to streamline your processes with Accounts Receivable Services? Join hands with Outsourcing Business Solutions, a leading outsourcing company with over 350 happy clients. Our accounting professionals take care of the accounts receivable process in an accurate, timely, and efficient manner. Contact us to get a free consultation!