4 Ways to Manage Accounts Receivable (with Success Story)

Have you ever heard the adage, “Revenue is vanity, profit is sanity, cash is reality?” Even if you haven’t, the sentiment will resonate quickly with those leading entrepreneurial companies: Accounts Receivable (AR) management can be a turning point for your business.

Whether you’re a bootstrapped startup or you have 500 team members, you’ve likely felt some level of pain when clients miss their payment terms. This pain can vary in severity—from a pesky outstanding balance to requiring funds from a line of credit to make payroll. This is especially true when organizations are in growth mode and investments are made which may not see returns for weeks, months . . . sometimes even years.

Keeping a strong focus on AR is the first step to ensuring your business has the right amount of funds to function or to scale up.

If you are having trouble managing receivables, minimizing aging, and ensuring a steady stream of cash flow, read on.

Why is accounts receivable management important?

Strong AR management can quickly translate into healthy cash flow for business growth. However, businesses often focus on the development and sale of their products rather than reviewing and collecting outstanding receivables. This impacts cash flow—an important asset for high-growth companies. For a business to consistently build cash flow, staying on top of its receivables is a must, and transforms its finance function from a cost center into a value center.

Did you know that companies write off an average of 1.5 percent of their receivables as bad debt? For a company bringing in $4MM in annual revenue, that’s the cost of one additional team member.

Let’s look at few ways to efficiently manage your receivables. 

• Extend Credit Wisely: To whom are you extending credit? What payment period are you establishing to evaluate the liquidity of receivables? Answering these questions will help you determine credit worthiness of your customer.  This helps ensure that the partner you are extending credit to is trustworthy and can clear your invoices.
  
  Accounting experts regularly advise high-growth companies to define the amount of risk they are willing to take by establishing a credit policy, examining cash flow statements, analyzing debt to income ratio as well as assessing assets of the partner or company you are extending credit to. At the same time, it is also crucial to review certified financial statements and carrying out threat and opportunity analysis of customer’s business environment.  This ultimately enables you to extend credit—on your terms, with clarity and can help you improve top-line revenue.
   
• Monitor Collections: Typically, high-growth businesses are so focused on moving from sale to sale that they fail to measure the real revenue generated from each sale. A trained resource can identify the state of AR while ensuring timely collection.
  
  Setting up a useful AR tracking system that reports KPIs such as days sales outstanding, turnover ratio, and percentage of inaccurate invoices that need revision after sending can help track collection status.

Featured Success Story

CPG Food Business Reduces AR from 51% to 20% of Gross Sales

The US arm of an international CPG food company was struggling with receiving payment from stubborn distributors. Its accounts receivable as a percent of gross sales was as high as 51 percent, and it was losing the trust of its parent company and venture partner. 

Accelerated Growth (AG) implemented a comprehensive review and learned from the distributors that certain invoices had inaccuracies and were therefore not being paid. AG established a process to confirm the accuracy of invoices upon the initial send, and not only helped collect outstanding payments but also reduced the company's AR to 20% of gross sales.
 

•  Accelerate Cash Receipts: Figuring out ways to receive rapid payments from customers can be daunting. Companies need to simplify the customer payment process and promptly inform the customer about the invoice due date. One way to do this is to ask customers to pay via credit card, wire, ACH, or other online transfer. This can be coupled by providing incentives to customers who pay on or before and penalties to those who fail to make timely payments. Depending on the business model, companies can also set up customers for automated payment. This makes it easy to meet the terms and predict cash flows.

Several AG partners provide a 2% discount to key vendors if payment is made within terms. This provides the vendor with savings and the AG partner with a quick receipt of cash for reinvestment in the company.

• Build Strong Client Relationships: Just as you can enable automated payments, you'll also have a responsibility to build transparent business relationships. Customers are more likely to accept terms of service or pay faster if they like the business relationship that they have with you. 

At AG, we take a process-driven approach for managing AR to accelerate payments. This includes:

• Reviewing all customer accounts
• Working with our partner to understand its best and most important customer relationships
• Implementing an AR system that provides ACH or wire connections with customers, and inviting as many customers as possible to connect
• Determining key performance indicators (KPIs) in a reporting view that can be easily updated on a weekly basis
• Consistently reviewing KPIs and AR Aging reports during the month-end close process

Mitigate Collection Risk

It is important to have a strong control over AR procedures, generate regular reports to review collections, and generate clients’ profiles. These help make informed decisions about collection approaches and can predict future customer behavior, thus reducing collection risk.    

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