How to Monitor and Manage Accounts Receivable to Improve Cash Flow

Introduction

Accounts receivable (AR) refer to the money owed to a company by its customers. In other words, AR forms the short-term obligations of customers arising from goods or services they have purchased on credit. As such, monitoring and managing AR plays an important role in improving a company’s cash flow.

Reasons to Monitor and Manage Accounts Receivable

• Enabling businesses to increase their working capital
• Detecting and avoiding any potential bad debts
• Helping businesses to provide better customer service
• Improving a business’s cash flow and speeding up collections

Identifying Unmanaged Accounts Receivable

Reviewing an aged trial balance report and tracking unpaid invoices are two critical steps for organization's to identify unmanaged accounts receivable and improve cash flow.

Review Aged Trial Balance Report

Aged trial balance report is a list of receivables that are categorized by how long it’s been since invoices were sent to customers. It provides an overview of customer credit balances and helps you to identify customers that owe money. It can also help to flag delinquent accounts and customers with high balances that need attention.

Track Unpaid Invoices

Invoices are often sent out to customers and those payments can be tracked manually or with a third-party system like an invoice-tracking software. Knowing which invoices are past due, or close to due date, will enable a business to take proactive steps to encourage payment. Tracking invoices allows you to contact customers early on to negotiate payment plans and give them multiple payment options.

• Regularly review aged trial balances to spot issues before they become too difficult to manage.
• Track invoices to ensure customers are kept informed about payments and make it easier to take action when payments are late.

Strengthening Policies and Processes

A strong policy and process structure is essential for managing and monitoring accounts receivable. It ensures that invoices are properly documented and that approval and payment processes and requirements are updated and adhered to. Here are some ways to strengthen your policies and processes so you can improve cash flow.

Create Written Policies and Guidelines

Developing clear, written policies and procedures created for accounts receivable is the first step towards better managing cash flow. Include the details of how funds are collected, document when invoices should be sent, and create a process for customers who are struggling to make payments. Additionally, if you offer terms or discounts for payment, outline those in the written policies. Having written policies and procedures in place will help ensure the accounts receivable process is streamlined and consistent.

Create Clear Processes for Approval and Payment

Be sure to clearly document the approval process for issuing an invoice, as well as the payment process and risks associated with late payments. To minimize the risk of late payments, it’s important to have as few steps as possible for billing and invoicing, such as automated processes. It’s also important to send invoices as soon as services are rendered or a product is delivered. For customers who are slow to pay, consider offering incentives or discounts for early payment. Additionally, communicate timelines and payment expectations in the invoice reminder.

Developing clear, written policies, processes and guidelines for approval and payment is essential for managing accounts receivable. Following these steps will help ensure that your organization’s cash flow is optimized and that any potential risks associated with late payments are minimized.

Setting Payment Terms

The terms of payment requirements for accounts receivable should be carefully considered by any business that wishes to maintain a healthy cash flow. Setting the payment terms for your business can have a large impact on whether customers make payment on time or not. It is important to determine the optimal terms so that your customers are incentivized to pay invoices quickly and adhere to the payment schedule.

Determine Optimal Payment Terms

Determining ideal payment terms for your customers hinges primarily on their industry and the size of their business. For example, large companies and those in the B2B sector may prefer net 30 payment terms while those in the lower-margin consumer goods sector may prefer net 15. Offering different terms of payment to different customers can help to ensure that everyone is satisfied with the requirements.

Businesses should also take into consideration the effect that payment terms have on their customers. While terms such as 'net 15' and 'net 30' can encourage swift payments, these terms can also make it difficult for customers to stay afloat. It is important to think about the impact different payment terms can have on customer relationships and debt collection.

Promote Automated Payment Solutions

Automating payments can be a great way to ensure that invoices are paid quickly and on time. Rather than waiting for customers to manually enter payment information, you can promote automated payment solutions such as direct debit, credit card, and mobile payments. All of these methods make it easy and convenient for customers to pay invoices and give them the incentive to do so in a timely manner.

Providing customers with automated payment options can also help to streamline the payment process allowing for more efficient cash flow management. Business owners can provide customers with detailed instructions on how to process payments, as well as provide instructions on how to set up automated payment methods.

Aligning Rewards with Payment

Structuring rewards to incentivize timely payment can help expedite the collections process and yield improved cash flow. Here are two ways businesses can align rewards with payment.

Offer Incentives for Early Payment

One way to incentivize rapid payment is to reward customers for settling their accounts receivable early. For example, businesses can offer a discount for payments received within a certain time frame. This could be used for a select few customers or for all customers. A 5% discount for early payment may allow the seller to cover the cost of the discount and still have the benefit of faster payment.

Utilize Fee Structures to Incentivize Prompt Payment

Fee structures are another popular way of incentivizing customers to pay their accounts receivable in a timely manner. Companies can charge late fees on any payments not received before a predetermined due date. This can be a flat fee, staggered fees as the invoice ages, or a combination of both. Companies also have the flexibility to create customized fee schedules which would allow them to impose larger fees as the invoice ages.

To ensure customers are aware of the late payment fees, businesses must clearly communicate the fee structure. The most common way is to include a statement of the fees in the invoice sent to the customer. Additionally, it should be noted that these terms should comply with the laws and regulations of each state.

6. Establish Stronger Relationships with Clients

Monitoring and managing accounts receivable is a necessary practice to ensure the health of cash flow. To effectively do so, among other practices, it’s important to establish stronger relationships with customers and clients. Good customer relations can lead to improved communication and the development of payment strategies that work for both the customer and the company.

A. Foster Open Communication

The key to improving customer relationships is to make sure that all parties involved are on the same page. It is important to maintain an open line of communication so that both the customer and the company have a realistic understanding of the other’s expectations. Both parties should be aware of the payment terms that have been agreed upon, so that there are no unnecessary surprises. Regularly scheduling check-in calls can help to ensure that any issues are ironed out swiftly and amicably.

B. Develop Payment Strategies Together

If payment issues arise, it’s best to develop agreeable strategies with the customer. Understanding their particular circumstances can help to establish the most beneficial terms for both parties. Depending on individual customer needs, the company may be able to make flexible payment arrangements that still allow customers to meet their obligations. Methods such as setting up payment plans or reducing interest rates may be beneficial for both sides. Establishing reasonable payment options helps to reduce customer stress and keeps everyone happy.

Encouraging customers to develop payment plans with the company is a crucial part of maintaining healthy customer relations and fostering a positive reputation among its clientele. By properly monitoring and managing accounts receivable, companies can ensure that cash flows remain healthy and steady.

Conclusion

Monitoring and managing accounts receivable is an essential and effective method of improving cash flow in any business. By understanding how accounts receivable works, regularly tracking accounts receivable, and utilizing helpful tools, a business can make sure that customers are paying their bills on time, and that the business is managing its cash flow as efficiently as possible.

Summary of Tips for Monitoring and Managing Accounts Receivable

Several tips can help businesses monitor and manage their accounts receivable in order to improve cash flow. These tips include:

• Understand how accounts receivable works
• Budget for accounts receivable
• Monitor accounts receivable on a regular basis
• Utilize helpful tools and technology
• Stay up to date with financial management best practices
• Create a system to track customer payments

Benefits of Improved Cash Flow Management Through Accounts Receivable Monitoring

By monitoring and managing accounts receivable, businesses can benefit from a more streamlined and efficient cash flow. This is especially important for businesses that are rapidly growing and need financial flexibility to withstand short-term volatility in their cash flow. Monitoring and managing accounts receivable can also help businesses take advantage of opportunities to invest in growth initiatives, such as hiring new staff or investing in new technology.