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May 20, 2020

Accounts Receivables: Where the Cash is Hiding

While there is much unknown today, one thing is for certain – the need for cash is a top priority.  Business owners and CFOs who pivot now will be best prepared to handle these uncertain times. One place to make changes is in accounts receivables.  

Over the last several years, businesses enjoyed a booming economy, low interest rates and ample cash flow.  When times are good, there is a tendency to get lax about receivables. But now as supply chains are affected and managing cash flow becomes more important, companies typically look to optimize three key strategic aspects of working capital:

  1. Cost-cutting
  2. Inventory management
  3. Delaying the accounts payable process

We suggest account receivables is #4.

Accounts receivables are often the largest line item on a balance sheet and have traditionally been an administrative concern. However, as the fourth key factor of optimizing working capital, accounts receivables offers an untapped opportunity for innovation in making the most of working capital.

Manual cash application and other similar repetitive tasks dominate the work day, leaving little or no  time to spend on strategic value add activities. As economic factors change over time, so does a company’s ability to manage their accounts receivables – but this is where cash could be hiding.

Strategies to Improve Cash Flow Surrounding Receivables

In order to develop strategies to help your cash flow, you need to understand your current state.  Be sure to review these categories and ask yourself these questions. The answers will help you identify what you are doing right in accounts receivables and what changes need and can be made.

Credit Policies and Procedures:

  • Do you have a credit policy, or when was the last time it was reviewed and updated?
  • Do you use information from such sources as industry credit groups, credit bureau reports, financials statements, credit references, and public records to evaluate an applicant’s credit?
  • Do you re-evaluate a customer’s creditworthiness on a regular basis, or at all?
  • Do your procedures clearly outline the terms and conditions of the sale of your products/services?

The ability to extend credit to a customer is not given, it’s earned by the credit worthiness of that particular customer. The credit policy is in place because you are taking a risk when you extend work or product to a client. A credit policy is in place to help mitigate the risk, formalize procedures for determining acceptable risk, and set up procedures for dealing with the credit relationship. The need for good credit management to protect your cash flow and working capital becomes even more critical at a time of uncertainty due to economic factors such as the Coronavirus and political turmoil, and others.

Invoice Presentation

While much of this advice might sound pretty straight forward and easy, many companies struggle to get invoices to customers in a timely manner or worse yet, the invoice has incorrect information that delays customer payments. After all, it’s hard to collect an invoice the customer does not have or is inaccurate or incomplete. See how many of these questions can be answered with “yes.”

  • Are invoices issued within 24 hours of providing service or shipping of merchandise?
  • Are invoices automatically generated by your inventory or other invoicing system?
  • Are invoices accurate, clear and complete?
  • Are invoices sent electronically allowing for quicker receipt?
  • Does your organization allow for payments via ACH, credit cards or other electronic means?
  • If electronic payment options are available, have these options been prearranged you’re your customers, or presented along with the invoice to allow for quick and easy payment?
  • If you assess late fees, is this clearly provided on the invoice?

Use a cloud-based software for invoicing. If not part of your accounting software, make sure the software integrates with your accounting system to eliminate any manual effort. Cloud-based systems allow you to access the information anywhere and are often more secure than other alternatives. Most options provide for different invoice delivery methods and payment options, allowing for improved collections. This software can also help you can more accurately track receivables. You can see the invoices that have been sent, and if they’ve been viewed by the customer; as well as what’s been paid and what invoices remain outstanding.

Cash Application Procedures

An area that causes trouble is when customers pay their bills. Ponder these questions regarding your current procedures.

  • Are your cash application procedures manual or has artificial intelligence been employed for automating cash application across all payment and remittance formats?
  • Are cash receipts being posted daily?
  • Do you allow receipts to be credited against a customer’s account rather than apply receipts to a specific invoice?
  • Do cash receipts go into a suspense account rather than reconciling customer accounts on a timely basis?

As payments come in, it’s essential they be applied both to the right customers and to the specific customer invoices to which they relate. And this needs to be done on a daily basis so you always know which accounts are up-to-date and which are outstanding. Otherwise, it’s impossible to track which customers paid on which invoices – making follow-up on late payments a virtual nightmare. Companies that get this wrong often waste considerable time and resources.

Collections and Deductions Management

As a way to manage your cash flow, you may be employing the strategy of delaying payments to your suppliers. Don’t be surprised if your customers are thinking about doing the same thing to you. That’s why it’s important to improve the rigor of your collection processes. It may be time to review and make changes.

  • What are your collection policies?
  • How often is the aging report updated?
  • How often are receivables reviewed for collections?
  • Does your credit policy provide for specific procedures surrounding collections?
  • What are your procedures for identifying and resolving invoice disputes and short payments?

Get the basics right, such as accurate invoicing. Any errors in your billing process can lead to costly delays in receiving payment. Strengthen processes to make sure your accounts receivable aging reporting is accurate. Make sure you are following the collections process outlined in your credit policy. Also, focus on customer-specific payment performance and identify companies that may be changing their payment practices. You may even want to start contacting your customers with larger accounts before the invoice becomes due to make sure these balances are paid timely.

With companies reeling from the effects of COVID-19, taking an in-depth look at your accounts receivables is a smart and critical step to take. You may find some hidden cash, or at least will know where it is not. Contact an Anders advisor to learn more about benefits of Virtual CFO services for your business.

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