Cash flow

With all the things going on in your business, it’s easy to overlook the significance of how quickly you convert sales into actual cash in the bank. However, how fast this happens – measured by accounts receivable days – can make or break your business’s ability to grow, invest, and even meet its own financial obligations. Accounts Receivable Days (or A/R Days) is just the average number of days it takes you to collect from a sale. If you have a cash-and-carry business your A/R Days is going to be 0. Ideally, we want to keep the A/R Days as low as possible and take action to decrease Accounts Receivable Days.

Here are some suggestions for systems and policies you can implement to work toward decreasing A/R Days.

Systems and Policies

  1. Implement stricter credit policies: Before extending credit to customers, conduct a thorough check of their credit history. This can help you avoid dealing with customers who have a history of late payments.
  2. Use electronic invoicing: Electronic invoices are typically processed and paid faster than paper ones. Customers can pay immediately online, speeding up the collection process.
  3. Offer early payment discounts: Incentivize your customers to pay their invoices ahead of time by offering a small discount for early payments.
  4. Regularly review receivables aging: Regularly reviewing your accounts receivable aging report can help you identify and address late payments sooner.
  5. Automate reminders: Use software to automatically send reminders to customers about upcoming and past-due invoices.
  6. Implement a recurring payment system: If you have regular customers, set up a recurring payment system. This ensures that the payment is collected on the same day each month, reducing the chance of late or missed payments.
  7. Hire a dedicated collections officer: If your business has a significant amount of receivables, it might be worth hiring a dedicated collections officer to chase late payments and manage accounts.
  8. Negotiate payment terms: If a customer consistently pays late, it might be worth renegotiating your payment terms with them. Perhaps they need a longer payment term or a different payment plan.

Remember, it’s important to maintain good relationships with your customers during this process. While it’s crucial to reduce your Accounts Receivable Days, you don’t want to damage valuable customer relationships in the process.

 

Beyond the policies and systems you implement, your team, and their ability to deal with the business financials and understand the bigger picture impact is important as well. Here are some ideas for how to have your team help the business decrease A/R Days.

Team

  1. Training: Train your staff about the importance of cash flow and how Accounts Receivable Days affect it. Make sure they understand the payment terms and are able to explain them clearly to the customers.
  2. Communication: Encourage your staff to communicate with customers about their payment obligations at the time of service delivery. They should also be trained to handle basic queries regarding invoices.
  3. Streamline Billing Process: Have your office staff promptly prepare and send out invoices as soon as services are rendered, or products are delivered. Any delay in invoicing can lead to a delay in payments.
  4. Real-time updates: Equip your technicians with mobile devices that enable real-time updates of completed jobs. This allows the office staff to invoice immediately upon job completion.
  5. Dispute resolution: Train your customer service team to handle any disputes quickly and effectively. The faster a dispute is resolved, the quicker you can collect the payment.
  6. Incentives: Consider providing incentives to employees for timely collection of payments. This could be a bonus, recognition, or other rewards that motivate employees to contribute to reducing Accounts Receivable Days.
  7. Feedback system: Encourage feedback from all staff members on how to improve the billing and collections process. Those who are on the front lines often have valuable insights into customer behavior and potential improvements.
  8. Regular Reviews: Regularly review your AR processes and systems with your team to identify bottlenecks or inefficiencies that could be slowing down collections.

Remember, everyone in the company plays a role in cash flow management. By involving your entire team in the effort to reduce Accounts Receivable Days, you can create a more cash-conscious culture within your organization.