Cash flow is essential for running a thriving business. Those with optimal cash flow have mastered the balance between outflows (payable) and incoming payments (managing accounts receivable).
They have a rigorous process that allows them to anticipate most cash flow threats before they occur. Accounts receivable management is very important for any company because day-to-day business depends a lot on it. This is where you need to attract funds to pay your employees, fund the day-to-day expenses of your company, and grow your business. Therefore, payments must be collected on time.
Managing your Accounts receivables is an important part of dealing with this threat. If you have too much money tied up in receivables, you won’t have the resources to meet your obligations, especially if the AR is overdue. Fortunately, tracking your AR is a sensible goal.
Without the expected funds, companies are forced to use the money in their reserves for other purposes. Bankruptcies usually have problems that result in an inefficient debt collection system that leaves them unable to collect what customers did not pay.
According to the survey, one in four small businesses is struggling to manage their accounts receivable because customers paid them short, paid outside of specified terms, or couldn’t pay due to financial failures due to an economic downturn.
This situation can be resolved by taking a number of steps which will ensure better management of your AR.
What are managing accounts receivable?
Accounts receivable (AR) is the cash balance owed to the company for goods or services that have been supplied or used but have not been paid for by customers. Accounts receivable are shown on the balance sheet as current assets. AR is the amount of money the customer has to pay for purchases on credit.
Now that we know AR definitions, let’s look at some critical considerations in AR management.
How do you manage accounts receivable?
Here are 5 quick steps that can help you manage your accounts receivable process:
- Make the process a guide: The first step in creating a process is defining it. What are the next steps for receiving payment when you agree with the customer? Do you pay in advance or after your party signs the contract? Define a process and develop it into company policy. This guide will help you better estimate your cash flow situation.
- Communicate payment policies or periods with your customers: Once the policy is in place, you need to make it available to your customers, ideally before doing business with them. Be clear about the benefits of early play (such as offering a discount) and the consequences of late payments, as well as additional terms such as prepayments.
- As a small business owner, it can sometimes be difficult to stick with your customers about late payment fees. Therefore, it is much easier to provide positive payment support on time than it is to provide negative reinforcement for late payments.
- Make it easier to know your cash flow or monitor collections: Always have your unpaid AR number ready. When you have to spend hours in Excel to get these numbers, it’s hard to get an accurate picture. If you haven’t already, there are a few tools you should investigate that can automate this process for you.
- One of the advantages of switching to paperless electronic payments is a system that allows you to track payments for yourself. Paperless means automatic reporting, no piles of client files and manual spreadsheets. If you always know how much money is tied up in accounts receivable, you could be more precise in another area of your company.
- Assessing the Liquidity of Receivables: Maintaining liquidity in business is very important. And this is one of the factors that determine the survival and existence of the company in the long run.
- If the company pays its dues on time, it has a good reputation in the market. This liquidity can be measured by calculating the various liquidity metrics as a quick metric, as a current metric.
- Speed up cash flow when needed: Regardless of company size, but always lack financial resources. And when a company is in dire need of cash, collecting receipts from its creditors is a great way to raise funds. Creditors’ income can be accelerated by creditors by stimulating them and offering them benefits such as charging lower interest rates.
- If a payment is made before the due date, they promise to offer good credit terms for future transactions, offering it for a longer period without charging additional interest rates.
Accounts receivable is only part of the cash flow component, but can be improved with a little planning and execution. By following these steps and creating a checklist on how to manage your receivables, you can better understand your cash flow situation. If you didn’t follow these steps today, pick a few to get started and see for yourself how useful they can be for your business.
AR is about being specific and consistent, tracking accounts, and working with other people. The more systematic you do it yourself, the easier it will be.
Every mismanagement of your AR has a direct impact on your business. The profits you expect from doing business with your customers are the lifeblood of your business. Managing your managing accounts receivable is a time-consuming function for good reason. No company can afford to let go and expect their business to grow.
The problem is, you and your staff probably don’t have enough time to do this. Then there are third party persons who can offer an efficient service for organizing and managing their claims.