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02.25.20

Six Ways to Improve Accounts Receivable
Chris Arndt

Improve your cash flow by improving your accounts receivable process

When you are trying to improve cash flow or working capital, a great place to begin is by improving your accounts receivable (AR) cycle.

Does this sound familiar? You have a sales team driven to get the job done, but customers never seem to pay on time. Or, it is becoming increasingly harder to carve out the time to make sure invoices are being paid within the set terms. You created AR processes about five years ago, but have not reviewed or updated them since.

While many businesses may have AR processes in place, I have found it is not uncommon to see them struggling to enforce them, especially if they are a company that places a heavy emphasis on sales.

Common missteps in accounts receivable

  • Failing or forgetting to follow up with late customers in a timely manner.
  • Neglecting to train staff — specifically sales staff — on the effects of late payments and how to follow up appropriately with late-paying customers.
  • Failure to adopt best practices in invoicing.
  • Ignoring the issue altogether.

Six ways to improve your accounts receivable cycle 

  1. Begin with Your Accounts Receivable Metrics
    Review your accounts receivable reports often: Balances past due, customers owing or DSO (days sales outstanding). Aim for a smaller DSO to reduce your cash flow needs. Determine which accounts receivable key performance indicators (KPIs) are most relevant to your business. Next, review these reports regularly (at least twice a month) to know where your AR efforts could be improved.
  2. Establish Firm Payment Terms
    Create a formal credit process on any customers you will give terms to. Make them fill out credit applications and request existing trade references. Discounts should only be offered in instances where doing so will directly benefit the company.
  3. Offer Multiple and Instant Payment Options
    This may seem obvious, but all too often we see people offering only one or a few ways to pay. With all the EFT and options available online, the best thing you can do is to offer multiple ways to pay, even if it comes at a small fee. You want it to be easy for your customers to pay you. Consider offering a few different structures for paying:

    • Discount for Payment Upfront
      One way to improve your cash flow is by offering an early payment discount to your clients or customers that pay before the terms set in your invoice. Even with the discount, it is better for your cash flow to have it in-hand rather than waiting for late invoices.
    • Fixed-Fee Structure
      Another way to tackle outstanding AR balances is to offer a fixed-fee structure. This can prevent higher-than-expected invoices and the resulting late payment issues that follow.
  4. Automate Wherever Possible
    Look to cloud accounting solutions to automate parts of your AR cycle. This eliminates manual entry errors and reduces transaction processing time. Using the right system for your business can:

    • Optimize many aspects of the AR cycle;
    • Ensure addresses are up to date; and
    • Set automated terms by customer.
  5. Be Proactive About Your Collections
    Move fast on past-due AR. If you think any of your outstanding invoices are more than 30 days past due, you are already in catch-up mode. Worse, if you are unsure on how many days past due, then you should circle back to #2. Train your staff to know how to deal with late-paying customers and how to employ collection efforts in line with your best practices. Align your team to your financial goals to get buy-in on your collection efforts.
  6. Get Rid of Accounts Receivable
    The best method for managing AR problems is by saying goodbye to them entirely. Of course by asking for all the payment upfront you avoid all AR woes and this cash flow problem altogether.

One sure way to tank your business is by ignoring common cash flow problems like a growing accounts receivable balance. By reviewing the six steps above you can be sure you have optimized your AR cycle to meet your business needs.

For more information, contact Chris Arndt at carndt@orba.com or at 312.494.7014. Visit ORBA.com to learn more about our Cloud CFO Services. 

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