Even with steady sales, your company might have cash flow issues due to a lack of accounts receivable management that could slow or stop your company's growth.
Cash flow management issues can cause many challenges. For example, businesses with cash flow problems may have trouble paying venders, making loan payments or paying themselves or their employees.
In some cases, a company might even need to turn down a sale or opportunity because of cash flow problems.
“There are many different things that go into a successful business, but cash flow is what keeps it running," said Aaron Dyer, a business banking regional manager at City National Bank.
Having ample cash flow allows you to continue expanding, whether you want tobuy your company's buildingor upgrade your company's technology and need cash tolease equipment.
Small businesses that manage their accounts receivable (A/R) effectively have a formalized process for collecting accounts receivable as well as strategies for spotting potential cash flow issues and addressing them before they become detrimental to the business.
1. Automate and Consolidate Receivables
Automation can help you get paid faster by implementing processes that automatically send invoice reminders and recurring invoices. It can also help with invoice matching and expedited posting to keep cash flowing.
One of the important steps to ensuring on-time payment is making sure all parties are on the same page regarding payment deadlines, amounts owed and payment methods.
“Be out in front of it and have the dialogue early, making sure that clients are aware of when their payments are due," said Dyer.
Typically, this conversation happens when a business first becomes a client, but it can also happen if you've updated your accounts receivable collections process or if a client is continuously overdue and you need to realign expectations.
2. Simplify Invoice Payments for Clients
You should also ensure that you're making it as easy as possible for your clients to pay invoices. For example, make sure your invoices are clear and complete, with no missing information that might cause your client's accounting department to kick it out of the system for further review.
Banks offer a wide range of cash management services that can help you improve collections and better manage your cash-flow cycle.
One way to avoid the "check is in the mail" excuse is to implement electronic payments for your clients through Automated Clearing House (ACH) so they can pay electronically andboost your cash flowimmediately.
Another tool for cash management is a lockbox, in which clients mail checks to a special post office box monitored by the bank, where they can be collected and deposited immediately.
You may want to consider talking to your bankers or others in your industry about the cash management tools that would work best for your company, based on your current clients and business model.
“There are some different ways that we look at cash management. We like to take a collaborative approach with our clients, understand how they get paid today and their client base, and from there we can recommend the best cash management tools for them," Dyer said.
By implementing cash management tools that allow you to better track accounts receivable, you can create more efficiency throughout your business, saving you and your employees time.
3. Receive Payments Fast Through an Early Payment Discount
Another way to help manage accounts receivable is a 2/10, net/30 discount, where customers receive a 2% discount if they pay within 10 days, instead of 30. This helps to speed up the receivables process.
“For this type of discount, it depends on the industry. If you're in a very tight margin industry where every dollar counts, that 2% discount could be a lot of money to your prospective client," Dyer said. “Where a business can afford it, offering and encouraging early payment is important and can be very helpful in boosting cash flow."
It is important to seek advice from either banking professionals or industry professionals to evaluate whether this would be a viable option for your business to implement, based on your specific industry, Dyer advised.
4. Consider Accepting Credit Payments
Providing clients with the ability to pay through credit is another way to speed up your receivables. Having merchant card processing capabilities can allow you to accept all major cards, including debit, credit and mobile wallets.
5. Follow-Up Fast on Past-Due Receivables
The longer receivables go uncollected, the less likely they are to ever be collected, either partially or in full.
For that reason, your business likely has the best chance of collecting if you are aware of any past due receivables and can act to collect them quickly.
Whoever you choose to manage accounts receivable needs to understand that they must contact the client on the first day that a payment is late.
6. Implement a Deposit Amount & Late Payment Penalty
If your business is not charging interest on late bills, start now. A late payment penalty provides a further incentive for customers to pay their bills on time.
If your company has a policy regarding late payments, gently remind the client of any penalties they may face for late payments in the future.
Firmer communication may become necessary if payment is not forthcoming within a reasonable amount of time, including emails or letters informing the client that legal action is a possibility if the payment is not received by a set deadline.
Having an open conversation with clients can not only work to build stronger client relationships for your business but also allow you to understand why the payment was late and avoid that in the future.
To reduce your overall accounts receivable risk, consider requesting a deposit of funds upfront, before filling your customers’ orders.
7. Consider Offering a Payment Plan
You may have a past-due client who informs you, after a few payment reminders, that they're having cash flow challenges and need an extension to pay their bill.
If this happens, consider offering the client a payment plan for their outstanding balance.
“Setting up a payment plan and being flexible is helpful, especially when it comes to long-term clients, in terms of building loyalty," Dyer said.
It is also important to put the plan and its terms in writing and have both parties sign it. Also make all future sales cash on delivery (COD) until the past-due amount is paid in full.
8. Build Customer Relationships & Re-Train Staff
Train all your staff in client-facing positions to communicate with clients about your accounts receivable process. This can help ensure that customers understand the company’s expectations and can also provide an opportunity for customers to share their expectations or any issues with paying invoices on time. Customers’ clear understanding of your expectations will contribute to a smoother accounts receivable process.
9. Carefully Diversify Your Client Base
Adding new clients is usually good news—but only if those clients are committed to paying for your products or services on time. If you’re going to have to spend resources chasing down client payments, that client is not a good fit for your business.
Rather than welcoming just any new client, consider reviewing the credit risk of each potential client to ensure that their credit history is a good fit for your business. If they have had trouble paying other bills on time, they may also turn into an accounts receivable challenge for you.
In addition to reviewing a client’s credit history, consider communicating upfront with them about your payment terms. Some large corporations tend to stretch out payment terms to vendors and suppliers, sometimes up to 90 or 120 days. You may be able to accommodate those payment terms for some clients, as long as you have others who pay on 30-day terms.
Working with large retailers can be great, but client diversification is important, according to Dyer. “As a bank, we love to see diversification," he said. “We love when people have contracts with Walmart or Target, but also with smaller customers so that it's easier to run the business in terms of cash flow."
If you have a few large clients who typically pay outside of a 30- or 45-day window, focus on acquiring additional smaller clients and ensuring they pay on time so you ensure healthy cash flow while you wait for the longer-term payments.
10. Utilize a Collection Agency
Turning unpaid invoices over to a collections agency should be a last-resort option, but sometimes it’s necessary. If a debt has become uncollectible, or is taking too much of your time and resources, a collections agency can take over the pursuit of payment.
When you must use a collections agency, you will typically recover only a portion of the unpaid invoice. But that portion may be better than zero, and be important for maintaining cash flow and helping resolve your accounts receivable.
11. Create an Accounts Receivable Aging Report & Calculate Your Accounts Receivable Turn Over (ART)
Implementing a process to quickly understand the current payment status of all your accounts receivable can help you take control of accounts receivable management. The best way to do this is to create an accounts receivable aging report, which will track and measure the payment status of all your customers.
In an aging report, accounts are broken out by the number of days since the invoice was issued, such as:
- 0-30 days
- 31-60 days
- 61-90 days
- more than 90 days
The report also lists the amounts due. If this report is updated and reviewed on a regular basis, it can help you address any potential problems before the bill becomes past due.
“The financials and accounts receivable aging report are an important piece of weekly management for the business," said Dyer.
The Accounts Receivable Turnover Ratio
Another helpful tool is a calculation of your company's Accounts Receivable Turnover (ART) ratio, or the number of times per year that your business collects its average accounts receivable.
You can calculate ART using this formula:
Net Annual Credit Sales ÷ ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)
For example, if you have an ART of 10, that means your average account receivable was collected in 36.5 days.
This calculation evaluates your business's ability to issue credit and collect funds in a timely manner.
A high ART ratio can indicate that your company has an efficient accounts receivable collection process, while a lower ratio can signal the need to reassess your collection strategy as well as evaluate to which clients you are extending longer terms of credit.
This calculation allows for a faster evaluation of accounts receivable than the accounts receivable aging report.
Talk to Your Bank About Cash Management Tools
Whether it's through paper checks or electronic payments, the easier you make patying for customers, the faster you will get your money. We can help you simplify your collections process. Reach out to our treasury management team today to see how we can help simplify your process.
Whether you need the ability to accept electronic payments, a lockbox, or other cash management tools, City National provides technology solutions for working capital managementCity National can also seamlessly integrate your accounting software with your bank accounts, streamlining both the receivables and payables process.
