Optimizing the working capital is essential for improved operational efficiency and business growth. However, in most cases, cash gets trapped in the balance sheets and businesses fall short of achieving both their business goals and operations efficiency targets.
If you are facing similar problems then we bet you are also suffering from delinquent Accounts Receivables and are copping serious blows to your working capital potential. If Accounts Receivable is the core issue of your working capital problems then this blog is for you.
Accounts Receivable – Life Blood for Working Capital
Constituting the major share of a company’s assets, Accounts Receivable is the lifeblood for the working capital of any business. With the power to even impact a company’s future cash flow, it can make or break the business. Time and again it was the mismanaged Accounts Receivable that tends to be a common cause of cash flow shortages – 90% of the business shutdown due to cash flow problems.
So many small and medium businesses must always be wary of raising Accounts Receivable which can inevitably come to create cash flow problems. So if you are a business that is looking to improve your cash flow and optimize the working capital the first step any business can take is to get rid of sub-optimal Accounts Receivable practices that usually lead to delinquent Accounts Receivable.
As one of the leading remote accounting firms in the business, Back Office Accountants often works with businesses that encounter AR problems. Here are the 3 Accounts Receivable practices we recommend businesses avoid for improved cash flow and working capital:
Three Accounts Receivable Practices to Avoid for Improved Cash Flow:
- Adopting an inefficient customer credit approval process: Most businesses in an effort to improve sales and revenue resort to sub-optimal Accounts Receivable practices where credit approvals are performed on the whim, ignoring payment terms and conditions. Over time these lax policies (or lack thereof) pushes the business into a pit and raises the total Accounts Receivables.
- Businesses must set out clear and concise policies on credit approvals and extensions. Separation of duties between finance and sales personnel must be established.
- Assess credit limits regularly and establish timelines for credit applications.
- Review the credit approval process make necessary tweaks based on the market conditions, and risk profiles. Consider options to grants credit approvals for limited time periods if necessary.
- Lack of standard invoice/billing process: Though surprising, the majority of businesses seem to commit innumerable errors with invoicing and billing processes. Price, units, purchase quantities, customer accounts are some of the common areas where mistakes can happen.
Having a standard invoicing bailing process can help avoid these mistakes and eliminate the further delays in Accounts Receivable – having a master customer data portal can also help in this regard. Businesses can also choose to automate the invoicing or billing process to reduce human errors and time costs which saves them from making last-minute runs.
- Lacking a master database of customer data: Data entry errors due to lack of updated information or misinformation is the most common AR problem. Simple data errors in Accounts Receivable can further delay the AR process by days or months and this can be easily rectified with a centralized database.
- Centralize all the data on one standard platform with all the customer information – addresses, payment information, purchase limits, payment terms, discounts, credit terms and more.
- Ensure regular maintenance and update of customer data to ensure accuracy of the data.
- Conduct audits of the database for veracity, customer analysis, and insights.
- Document the changes made and enforce control over access to the data.
By creating standard credit approval process businesses can handpick the right clients to reduce Accounts Receivable problems by a mile. Having a standard customer master database helps AR resources to reduce errors and follow-up the client better to further improve Accounts Receivable performance.
Accounts Receivable Services by Back Office Accountants:
While the above three steps can look simple they can significantly improve the cash flow and more importantly eliminate fixable errors to give more control and clarity over the Accounts Receivable process.
However not every business has the right personnel/expertise or infrastructure to make these simple changes and if you are one of them you can consider outsourcing Accounts Receivable to trusted remote accounting firms like Back Office Accountants.
With a team of expert CPAs and Accounts Receivable experts, we possess both advanced accounting technology and domain expertise that has helped us improve the Accounts Receivable of hundreds of small and medium businesses. If you are looking to outsourced Accounts Receivable Services for improved cash flow and working capital, you can contact us here: https://www.backofficeaccountants.com/
