Accounts Receivable Management: The Key to Improving Your Cash Flow

by David Rubin, Credit Management Group – July 10, 2018
Accounts Receivable Management: The Key to Improving Your Cash Flow

Financial experts claim that up to 90 percent of businesses fail because of poor cash flow. Even established, profitable companies can become insolvent due to uneven cashflow.

Cash flow is the movement of money into and out of a company. Cash inflow comes from operations like providing services, obtaining financing or selling assets. Cash outflow occurs during operations such as meeting payroll, paying rent and making loan payments. Obviously, it is important to balance the inflow and out­flow of cash so enough money is available to meet expenses. Otherwise, a business may have to rely on a loan, line of credit or factor receivables.

Most people agree that the sooner you bill customers and address accounts receivable issues, the more likely it will be that you will be paid. Even so, it is not uncommon for companies to send invoices to customers at the end of a project instead of progress billing, to not pay enough attention to aged receivables, and to avoid making collection calls to customers.

Savvy accountants, on the other hand, have sound billing and receivable procedures. Invoices are sent monthly and accounts receivables are properly managed. As soon as an invoice is 30 or 60 days past due, depending on the company’s policy, efforts begin to collect the funds.

Making the Call

Particularly the case with smaller companies, managers may want to manage accounts receivables themselves but lack either the time, ability or support system to be effective. Typically, company leadership avoids making calls or sending correspondence to customers asking to be paid. I get it, talking about money owed is uncomfortable. But businesses need to reframe their thoughts on accounts receivable management. It’s their money and they have every right to discuss the matter with customers. And just because a customer pays his/her bills when they are 30 or 60 days past due, it doesn’t mean that you must accept being paid outside of the terms of what was agreed upon. If your terms are 30 days, you should be paid in 30 days.

Finding Time

Having the time to focus on accounts receivable management is generally an issue.  Corporate management is busy with meeting customer expectations, managing projects and the day-to-day operation of a company. Demands are put on management to meet realization goals as well as business development goals. Finding the time to also manage accounts receivable may be difficult.

Accounts receivable management is particularly troublesome for companies that may not have a department or people dedicated to the task. Asking staff members or the admin team to help might seem like a good idea but they might not have the skills to be effective.  Hiring staff for this function is another option but you will incur additional expenses including payroll taxes, overhead and benefits.  You might even have to purchase software to manage accounts receivable. A more practical and less expensive approach may be to out­source the function.

Whichever approach you take, focus on:

  • Using the right tone. Start with friendly messages and gradually build up to using language that is polite, but to the point; firm, yet not insulting; demanding, but not threatening.
  • Being consistent. Automatically send a series of correspondence every two to four weeks until the invoice is paid.
  • Knowing when to call in professionals. Protecting customer relationships is important. You may get better results by having someone else do the heavy lifting for you.

Accounts receivable management should be considered a critical function. If the cash is not available to sustain operations, your company may become a statis­tic. Avoid having a problem by carefully managing cash receivables.

David  Rubin

David Rubin

David Rubin is the managing director of Credit Management Group, one of the leading providers of off-site accounts receivable management services.

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This article appeared in the July/August 2018 issue of New Jersey CPA magazine. Read the full issue.