6 Fixes to Improve Your Accounts Receivable Cycle

6 Fixes to Improve Your Accounts Receivable Cycle

Improve your cash flow by improving your accounts receivable process.

 When you’re 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’ve got a sales team driven to get the job done but their customers never seem to pay on time; or it’s becoming increasingly harder to carve out the time to make sure your invoices have been paid within the set terms. You had some AR processes created… (about five years ago) and have never really reviewed them since.

 While many businesses may have accounts receivable processes in place, I’ve found it’s 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 the accounts receivable KPIS that 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 that 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’s better for your cash flow to have it in-hand 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; offer electronic billing for faster delivery, set automated terms by customer etc.

5.    Be proactive about your collections.

Move fast on past-due AR. If you think your any of your outstanding invoices are over 30 days past due you’re already in catch-up mode. Worse, if you’re unsure how many days past due than 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 accounts receivable problems is by saying goodbye to them entirely! Of course, by asking for all your 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 (AR) balance. By reviewing the six steps above you can be sure you’ve optimized your AR cycle to meet your business needs.

Marybeth Starr

Head of Brand Promise at Harvest Dental Products

4y

Good advice Chris!!

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