As an entrepreneurial organization, you need to maximize your working capital. This means freeing up cash from the balance sheet to fund key or new business imperatives, reducing debt levels, and ensuring positive cash flow.
One of the primary ways to achieve this is by improving your Accounts Receivable (AR) function. This requires tracking customer collections, analyzing Days Sales Outstanding (DSO) metrics, and eliminating bottlenecks for customer payments. However, managing AR can be challenging. Here are the four most common challenges small- to medium-sized businesses face in freeing up cash.
Let's look at the ways to tackle these challenges.
Improving AR begins with reducing DSO. A high DSO could mean that your clients are taking too much time to square up their debts.
One of the first steps to reduce DSO is to gain insight into your company’s DSO data and analyze how your DSO compares to that of your competitors. This helps set a DSO average that is realistic. You should also make DSO reduction a strategic priority. Doing so will drive efforts to set acceptable credit risk and help choose the right customers who pay on time.
Next, ensure you are communicating clear payment terms to your customers. The easy way to do this is by simplifying the payment process: ask customers to pay by credit card, wire, or online transfer. Lastly, you can also offer a discount if the balance is paid within terms. This might affect the income statement as a contra-revenue to be booked, but it is often worth it to have consistent cash flow.
Slow and inefficient AR record management could cause a cash-flow deficiency. Having a system that can allow end-to-end visibility into receivables is a must. Refining ledger management speeds up processing time and helps keep track of customer payment trends.
An accounting management system such as QuickBooks Online (QBO) is a great way to accept payments and improve AR visibility. It is also a good idea to add a complementary system that connects to QBO, such as Bill.com, to help connect with customers in receiving payments, issuing notifications, and streamlining records.
When volume is high, consider outsourcing to an expert or hiring a specific role internally who can focus solely on AR. This will allow your internal resources to focus on core business activities.
Keeping track of communications with your customers across channels helps sustain a healthy information flow, especially on AR. However, manually tracking communications to understand balance status is cumbersome and time-consuming. A customer relationship management (CRM) system can help quickly track the last point of customer communication.
Companies that invest in a quality CRM—one that can be easily integrated with their accounting system—have a full 360-degree view of client information that can help determine credit parameters and foresee when invoices can be paid.
When acquiring full customer details, information such as credit applications and credit scoring can be retained within the CRM system. This will help arrive at accurate customer credit decisions and determine the next best action for engaging customers.
Although most businesses have a well-structured credit policy to decide the frequency, timing, and amount to bill, very few companies enforce their policy or have the right processes to focus on improving working capital.
Enforcing credit policies will require your business to centralize AR processing so that it is accessible to your sales team, allowing them to follow up with customers on pending payments, deal with late payments, and ensure the accuracy of bills.
It is also important to provide the right training to staff to help them discern between those clients who would make great customers and those who would not. To inform and motivate the team, choose the right key performance indicators (KPIs) such as due invoices, unapproved discounts, and unfollowed terms to track AR performance on regular basis and see if it is meeting your goals. Also, you can work with a credit-check company to vet customers and set the right standards.
Creating a systematic process for receivables management will not only help you optimize working capital but also will train your clients to prioritize your invoice
Expert Tip: Maintaining good relationships with your clients also ensures that they prioritize your invoice.
This will simplify your collections process and put your business on the path for scalable growth. Beyond simply conducting gap analysis, experts at AG work with your team to tactically implement the right processes and systems so that you can prioritize cash receipts, assess AR, prompt customers to pay on time, and establish a proactive and automated system for the AR process.
As an entrepreneurial business, you need capital to grow fast. Isn’t it time to collect payments faster?
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Jason Pillard is a Senior Analyst at Accelerated Growth. He holds a bachelor’s degree in Finance with a minor in Entrepreneurship and Social Enterprise from Wake Forest University. As a native of Colorado, Jason enjoys spending his time outdoors on the Chicago lakefront or back in Colorado hiking and skiing the Rockies.