How to Improve Cash Flow by Streamlining Accounts Receivable Processes

As a business owner, you know that accounts receivable is more than just a line on your balance sheet. It plays an essential role in maintaining healthy cash flow, a critical component in your business’s stability. Finding ways to streamline the accounts receivable processes can help improve cash flow now and in the future.

Before you can start streamlining the accounts receivable process, you need to know what cash flow is and how it works. Understanding cash flow will give you some insight into how an improved AR process can boost it.

Cash flow is a measure of the cash that moves into (inflows) and out (outflows) of your business.

• Inflows include any income, including those generated by sales, loans and fundraising.
• Outflows include any and all expenses.

Ideally, a business should have positive cash flow, which means its cash inflows are greater than its cash outflows.

Now that you have a better understanding of cash flow, let’s look at the accounts receivable process.

Accounts receivable processes include the steps taken when:

• Invoicing clients
• Monitoring payments
• Securing the collection of payments

The AR process is not a standalone process. It plays an important role in the link between sales and revenue, ensuring that transactions are initiated and successfully concluded via timely payments.

Typically, the AR process is broken down into eight steps:

1. Order placement
2. Credit approval
3. Invoice dispatch
4. Collections management
5. Writing off debt that is uncollectible
6. Payment processing
7. Dispute resolution
8. Analytics and reporting

It is crucial to have regular reports on the status of your AR. These reports will provide insight into how efficient your process is and the financial health of your business.

Reports and analytics can give some insights into the effectiveness of your AR collection. But which performance indicators should you look at to assess the health of your AR?

• Prompt invoicing. How quickly do you send out invoices? The quicker they’re sent out, the sooner your business will get paid.
• Days Sales Outstanding, or DSO. Having a low DSO means that customers make payments quickly.
• Collections Efficiency Index (CEI). A high CEI means that your team has a high success rate with recovering receivables.

These metrics can give you insight into the efficiency and effectiveness of your AR process.

There are several strategies you can use to optimize your accounts receivable collections if your current process is inefficient.

These include:

• Automated invoicing: Sending invoices immediately after work is completed will ensure you get paid as quickly as possible.
• Automated collections: Enable automatic collections to notify customers of late payments. Sending collection reminders can help you recover payments more quickly and eliminate the time spent chasing invoices manually.
• Real-time payment processing: Automated payment gateways allow for quicker payment processing and improved cash flow.

Along with optimizing your AR process, it’s also important to ensure that you’re managing your cash flow properly.

AR strategies can be optimized, but they’re not the only areas where you can optimize your cash flow. For example, you can:

• Strategically pay invoices and bills so that you can wait until your invoices are paid (as long as you don’t face increased fees or penalties).
• Spend your cash wisely, and time your investments to when you know you’ll have more than enough cash.
• Accept payments using as many methods as possible: check, cash, credit, Apple and Google Pay and even crypto. Make it easier to be paid and your invoices will be paid faster.
• Negotiate payments with suppliers to lock in more favorable payment terms.
• Manage your own credit policies so that you’re not extending credit to customers who pay late.
• Use a line of credit or a credit card to help cover periods of low cash liquidity.
• Consider reducing your workforce if you have excess workers during slow periods.

You can and should use the latest technology to run cash flow forecasts.

Cash flow forecasts and projections give insight into your company’s financial health. You should have automation cash flow forecasts and statements created to help you identify:

• Issues with accounts receivable
• Slow customer payments
• Necessity to take on debt to keep operations going

For example, you may estimate that you’ll have $20,000 in outstanding invoices and $500 in free cash flow at the end of the quarter. You can opt to offer a 5% discount if the client pays the invoice within 30 days of receiving it.

Why?

If you provide an incentive for your customer to pay their invoice faster, it will increase the odds of them paying faster. Studies suggest that 54% of SMEs are not being paid on time. If you can improve payment speed, you should be able to increase cash flow.

Cash flow management must consider tax planning, too. If you’re not taking every deduction possible or depreciating equipment properly, it can lead to unhealthy cash flow levels, according to the University of Nebraska.

You can leverage many tax strategies to boost cash flow, including:

• Carry losses over to reduce future taxes and improve cash flow
• If overpayments are possible, you can decrease your estimated tax payments
• Accelerate deductions during a slow year to keep more cash in the coffers
• Secure tax refunds faster when possible

Your business’s operations are unique, and your tax burden will also be unique. It's crucial to work with a corporate accountant who can spend the time finding the deductions that you can claim. Accountants may also be able to leverage:

• Tax credits
• Grants
• Etc.

Tax strategies can be incorporated into your business today to help you reduce your tax burden, make lower estimated payments and keep cash flow levels higher as a result.

Accounts receivable processes help ensure that your business has healthy cash flow to keep operating. Your AR processes involve invoicing, payment monitoring and even securing outside funding to keep your business running.

If you learn to optimize these processes, you’ll be able to maintain healthy cash flow levels and make strategic decisions to grow your company.