Due to the ongoing pandemic, the foremost importance should be given to any organization’s cash flow management, whether small or big. Every business should find the most effective ways to manage their accounts receivable so that the receivables in their Balance Sheet gets converted to cash at the earliest. It is where accounts receivable management comes into the picture.
A brief on Accounts Receivables
As most of us know, the word receivable means “the amount of payment that has not been received.” It means that the company has extended credit facilities to the customers. Accounts receivable is the amount of monetary value equivalent to which a business sells its goods and services and has the rights to receive after a specific period.
For example, when a company has done some work for customer Y, then customer Y owes some money to the company, and the record of that is called accounts receivable. Usually, the credit period ranges from a month to a year.
A major part of any company’s assets is Accounts Receivable. It helps in generating cash inflow in the books of the company. It is a crucial thing because the company’s future cash flow is affected by it. The company provides credit facility to the customers to ease the transaction process and establish a strong credit relationship with the customer. It helps in getting better deals for the company. It helps attract investors because an investor will be able to check the company’s collection efficiency and become interested in investing if it’s a good record.
Accounts receivable management can make or break a business. When there is a delay in payment from the customer’s end, a company will probably be a few bucks away from a cash flow shortage, i.e., when more money flows out than the amount of money flowing in. Eventually, the business is unable to pay its own bills and carry on its functions smoothly.
Experts have agreed that about 90% of businesses shut down suddenly are because of faults in their cash flow system. Mismanaged accounts receivable often causes these devastating cash flow shortages.
Avoiding such mishaps is important for every business; hence they must efficiently manage their accounts to improve the working capital and avoid any disastrous cash flow shortages.
Every business wishes to buy low and sell high. However, they risk losing everything with poor accounts receivable management in the last stage, i.e., payment. More than half of the cases of bankruptcies have occurred due to a poor command over accounts receivables. It involves more than just reminding the customer to pay on time. It also consists of finding out why the customer has not paid and also the loopholes in the system because of which the customer has skipped the step. Was it because of any administrative error, or was it because any product or service was not delivered?
Proper management of accounts receivables of a business is a process consisting of the following elements:
Tips for efficient accounts receivable management
Even though these might look like very common practices, a surprising number of businesses do not follow these basic guidelines. So we have made a list as follows:
You need to run a credit check and verify a customer’s identity in the credit market before agreeing to do business. Most corporate clients have credit accounts of their own and provide all the necessary information before doing business without much ado. It’s okay to deny credit or to ask for payment upfront.
While doing business with a corporate client; it is important to ask for a personal guarantee on your credit agreement. This covenant will confirm the relationship’s authenticity and ensure that the payment is completed from the customer’s end on time.
Before commencing business with a new customer, it is essential to put all the payments in writing. Inform the client adequately about the total time they will have to pay the due amount, details regarding late fees and interest terms, etc.
Often, this point is skipped or not given much importance. But if the customer does not receive the invoice on time, you cannot expect the payments on time. An automated process to streamline sending invoices on time and sending documents more promptly is important.
Statistics say that customers will typically pay twice as fast if offered easier and convenient payment options. Nowadays, mobile payment has become a very viable payment option with an increasing user base. Platforms like Google pay and PayPal, and other online payment methods, will fetch the business faster payments because of their convenience.
Go through the receivable accounts daily to keep a tab on all the payments. Point out the discrepancies and report the same.
A strategic approach to deal with customers who have due payments and are past the due date. Consider all kinds of things like how many days past the due date will the late fee be charged, how much interest to levy, or how to let the customer know about all information, via call or email and other related things.
You must stick to your plan for managing the accounts receivables. Changing the course of treatment, according to the case, will only harm your business. Taking the steps that you have pre-planned for each situation will simplify your task with a great deal and improve customer adherence.
If any customer is habitually late in making payments, they are more harm than good for your business. Calculate your risk involved in future non-payment and non-compliance with the customer and take the necessary steps accordingly. Weigh the cash flow risks and see the costs involved against the relationship’s potential benefits with the customer. At this juncture, it is important to end the relationship with the customer simply. However, if it’s not easy, consider reducing their credit limit or demanding full payment upfront.
Good receivables management will directly contribute to your businesses’ profit due to its ability to reduce bad debt. The benefits include a better cash flow and higher availability of liquidity for your business’s investments and acquisitions. Moreover, proper accounts receivable management will boost your company’s image in the market. The three main elements of managing accounts receivables are – invoicing, monitoring, and collections. Any business should ensure that these steps are checked while carrying out its business and other functions to provide a stable future.
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