Accounts receivable (AR) is an integral part of your business. It measures the money customers owe for the goods and services you’ve provided and plays a vital role in determining your financial health because it generates cash flow. It also allows investors to gain a better sense of the organization’s liquidity status. Not managing your accounts receivable well can lead to the org’s downfall because you can survive (briefly) with a lack of profits but not a lack of cash flow.
To get a firm grasp on your business’ AR process, follow these best practices to mitigate errors and encourage early payments.
Proper cash flow is imperative for business growth, and for that, you need efficient accounts receivable management. Here are some innovative solutions to manage your AR.
1) Automate the Process
If you or your accounts receivable team is spending too much time sending or tracking invoices, collecting payments, and dealing with customer enquiries, automation is your best bet. Automating your AR process reduces human error, ensures shorter turnaround, and drives efficiencies in your AR process.
Choosing and integrating the right automation platform will not only provide an easy-to-navigate payment portal to your customers but also improve customer experience.
2) Outsource Accounts Receivable
Outsourcing your accounts receivable is a smart idea, especially for small businesses, because it helps improve your billing and payment process. You get a dedicated team of professionals handling your AR process at a relatively lower price than you’d pay if you hired an in-house team. Their experience, knowledge, and access to the latest accounting software can be of use to ensure a smooth and error-free AR process.
Be sure to choose your accounts receivable service provider carefully so you get a trusted partner and a good return on your investment.
3) Offer Discounts
Everyone loves a good discount. There’s something uniquely satisfying about it. Utilize this strategy to encourage your clients to make payments and fulfill their obligations in a timely manner. This can include offering discounts for early payments or full payments in a lump sum. This will help avoid unnecessary delays in payment and improve your relationship with clients.
4) Impose Penalties
Late payments are a financial burden on your business. A common solution is to impose penalties. While some business owners may disagree, saying the customer is king, others find this a feasible option to maintain cash flow.
If you think charging late fees may affect your relationship with customers, point out penalty information in the initial agreement so everyone is on the same page.
5) Regularly Review Your Accounts Receivable
This important practice helps ensure that your clients are paying you and identifies problem clients. With regular review, you can track the aging of your receivables and systematically follow up on past due invoices. You can also prepare a weekly AR aging report that shows unpaid invoice balances, along with how long they’ve been outstanding. This allows you to keep on top of slow-paying clients.
6) Have a Firm Credit Policy
A credit policy is a set of guidelines that lays down credit and payment terms for customers and establishes a clear course of action for late payments. Make sure you have a firm credit policy in place that all your customers are aware of. This can make debt collection much easier.
7) Track Your Accounts Receivable KPIs
Your business’s cash flow depends on how effectively you manage your AR. But how do you know how effective your management process is and whether there is room for improvement?
There are several metrics that help you analyze various aspects of your AR to evaluate its success. You can track your AR’s key performance indicators (KPIs), including:
Let’s understand them in detail.
DSO = (Average AR / Total Credit Sales) x Number of Days in a Period
Best Possible DSO = (Current Accounts Receivables x Number of Days in a Period) / Credit Sales for Period
ADD = DSO – Best Possible DSO
CEI = (Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) / (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables) x 100
ART = Net Credit Sales / Average Accounts Receivables
Follow these practices to streamline your accounts receivable process as it will be helpful for maintaining steady cash flow. In the absence of a well-managed AR process, you could end up with decreased revenue and destabilized finances. It is advisable to start optimizing your accounts receivable as soon as possible. If you need help, get in touch with Virtuous Bookkeeping for reliable accounts receivable services. We also offer bookkeeping and accounting services.
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