Because of the current pandemic, cash flow management must be considered seriously by any organization regardless of size. Every business must find the most effective methods to manage their receivables so that the receivables in their Balance Sheet gets converted to cash as soon as possible. This is where Accounts Receivable Management is essential.
An overview on Accounts Receivables
We all know, the word receivable refers to “the amount of payment that has not been paid.” It means that the business has provided credit facilities to the customers. Accounts receivable are the equivalent in terms of value, monetary or otherwise, to which a business sells its goods and services and the rights to be paid after the expiration of a specific time.
In the case of example, if a company has done some work for customer Y, then customer Y is liable for a certain amount to the company, and the document of that is called accounts receivable. Credit period typically ranges from a month up to a whole year.
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Importance
A major part of any business’s assets is its accounts receivable. It is crucial for creating cash flow into the books of the company. This is crucial because it affects the future cash flow of the company. Customers can get credit from the company to facilitate the transaction and build an credit relationship. This allows the company to get better deals. Investors are attracted to it because they can check the efficiency of collection by the company and determine if they would like to invest.
Controlling accounts receivables is a key element in determining the success or failure of a company. If a customer delays paying, the business is likely to be in a cash flow crisis. The business becomes insolvent, and it is no longer capable of paying its bills.
Experts agree that almost 90% of businesses that suddenly start closing down are caused by problems in the cash flow system. These cash flow shortfalls usually occur when accounts receivable are not adequately controlled.
Avoiding mishaps like these is critical for every business. Therefore, they need to efficiently manage their finances to improve working capital as well as avoid cash flow shortfalls.
Every business wants to to purchase cheap and sell it effectively. However, they risk losing everything with inadequate management of accounts receivables in the last stage, i.e., payment. Poor management of accounts receivables is responsible for more than 50% of the bankruptcy cases. It is more than reminding customers to make timely payments. It is about determining the reason why the customer isn’t paying and the loopholes within the system. This could be due to an administrative error, or it could be due to the fact that the item or service was not delivered.
The correct management of receivables for a business consists of the following elements.
- The customer’s credit rating in advance
- Monitoring customers’ credit risk
- Maintaining positive customer relations
- Detecting late payments in due time
- Detecting complaints in due time
- Reducing your total balance
- Stopping any receivables with bad credit remaining
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Tips for efficient accounts receivables management
These might seem like normal practices, but a surprising amount of businesses don’t adhere to these guidelines. Below is a list of things we’ve discovered:
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Do not extend credit to just anyone:
Before you can begin doing business with a customer, it is necessary to conduct a credit check. A lot of corporate clients are able to access their own credit accounts, and are able to supply all the necessary information needed to do business. It’s okay to deny credit or to ask for payment upfront.
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Get a Personal Guarantee:
While conducting business with a corporate client It is essential to request a personal guarantee on your credit agreement. This will confirm the authenticity of the relationship and will ensure that the payment is made on time.
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First Order of Business:
It is crucial to have all payment in writing prior to beginning business with a client. Informing the customer of the approximate time required to pay the amount due, the penalties for late payments and the terms of interest, as well as the exact payment deadlines, is crucial.
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Send Invoices Promptly:
In most cases, this aspect is skipped or not given much importance. You cannot expect payments to be made in time if invoices are not received in time by the client. It is important to automatize the process of sending invoices as well as to send documents faster.
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Customers can pay with ease. Options:
According to research, consumers are able to pay twice as fast if they have easy and convenient payment options. With a growing number of users mobile payments can be a viable payment option. Google pay, PayPal and other online payment options will enable businesses to get quicker payments because of their ease of use.
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Closely monitor payments as received:
Daily, review the receivables to ensure that you’re keeping track of all payments. Find out any differences and report them.
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Plan for Past Dues:
A strategic approach to deal with customers who are due payments and have not paid by the due date. Think about the way in which the customer will be informed via phone or email about any details.
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Consistency and Rules:
You must adhere to the plan you have to manage the receivables accounts. Your business will be hurt if you change the plan of action according to each case. Planning the appropriate steps for every situation will make your job simpler and improve customer satisfaction.
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Be aware of the right time to let go of the customer:
If a customer is consistently tardy in paying it is more damaging than beneficial for your company. Consider the risk of future nonpayment or non-compliance and then make the necessary steps. Consider the cash flow risks and weigh the possible advantages of the relationship with the customer against these risks. It is essential to terminate the relationship with customers at this point. If this isn’t possible, reduce the credit limit or ask for a full payment in advance.
Because receivables can be reduced this will affect your company’s profit. These benefits include better cash flow, availability of liquidity and more investment and acquisition opportunities. Additionally, proper accounts receivable administration can improve your business’s reputation in the marketplace. The three major components that are essential to managing receivables are – invoicing, monitoring, and collection. These steps should be followed by every business to ensure a steady future.
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