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.
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:
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:
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?
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.
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:
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:
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.
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:
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 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.
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