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