Table of Content
Categories
Managing cash well is one of those qualities that sets thriving businesses apart from those constantly struggling to stay afloat.
It helps you stand strong even when the market is unfavorable. A steady flow of cash also means you can seize every opportunity coming your way, make smart financial decisions, and stay ahead of the game.
At the heart of a healthy cash flow lies accounts receivable – a process that directly influences how and when money flows into your business. Mismanagement of this process can have consequences in the form of bad debts, delayed payments, strained customer relationships.
That’s precisely why managing accounts receivable is paramount.
Using accounts receivable analytics, you can identify bottlenecks in your collection process, assess payment patterns of customers, track down invoicing errors, and take timely steps to improve cash flow performance.
In this blog, we will explore practical strategies to become cash fit using accounts receivable analytics.
Cash flow: the lifeline of your business
Cash flow reflects your organization’s financial health. It shows the money that goes in and out of a company over a period of time.
With a cash flow statement, you can gauge the liquidity of your business, as in how much cash you have in hand to meet your financial obligations. Cash flow also influences operational aspects like paying employee salaries and funding new initiatives.
When well-maintained, your company operations tend to run smoothly. You can pay off debts on time, invest in your company’s growth, expand your workforce, and stay resilient even in turbulent times.
With respect to accounts receivable (money owed to your business), there are several challenges that can weaken your cash flow, such as:
- Delayed payments and outstanding invoices: This happens when customers fail to pay you on time, impacting the cash inflow and liquidity. It’s easy to lose control of your receivables when you don’t have proper visibility into which invoices are overdue or closer to the due dates.
- High DSO (Days Sales Outstanding): A prolonged DSO cycle indicates that your company is giving too much credit and taking too long to collect payments from customers. This can result in a thin cash flow, leaving you with not enough money to meet your obligations.
- Lack of insights into customer payment behavior: Without granular insights into payment patterns of customers, it’s difficult to identify the ones who pay consistently and the ones who have a habit of paying late. This limits your ability to tailor your credit terms or collection strategies.
- Prepayments & overpayments: Prepayments and overpayments might look positive at first glance, but they can lead to reconciliation challenges and also complicate financial reporting.
- Incorrect invoicing: This happens when a customer mistakenly pays twice for an invoice, when discounts aren’t correctly applied, or even when invoices are sent goods or services not yet provided. Inability to identify such discrepancies on time can slow down the collection process.
These are some of the many challenges that highlight the need for a data-driven approach for managing cash flow and ensuring your business never goes cashless.
How are cash flow & accounts receivable connected?
Any movement in accounts receivable directly affects cash flow. While AR is the money owed to you, cash flow reflects the movement of money going in and out of your business.
With efficient accounts receivable management, you can:
- Maintain liquidity to carry out daily operations
- Predict your company’s cash needs for the future
- Meet your financial obligations and make investments
What happens when AR increases or decreases?
A rise in AR means that your money is still stuck with customers. This can lead to liquidity constraints, a higher risk of bad debts, and a slowdown in day-to-day company activities.
When AR decreases, it’s a sign that your business is successfully collecting payments. Faster collections mean your business is well-positioned to meet its financial obligations, pay off debts, and fund new initiatives without hassles.
Understanding accounts receivable analytics
Accounts receivable analytics is all about harnessing the power of data to uncover payment patterns, identify gaps in your collection process, and assess the overall health of your company’s cash flow.
Here are some of the key accounts receivable metrics that form the foundation of AR analytics:
- Aging reports: These reports show how much time has passed since the invoices were sent to customers. Unpaid invoices are classified into buckets like 0 to 30 days, 31 to 60 days, 61 to 90 days, and so on. With this data, you can identify overdue accounts, flag accounts that are at high risk of turning into bad debts, and take corrective actions on time.
- Days Sales Outstanding (DSO): If you want to know how fast or slow customers pay their bills, this is the metric to have your eyes on. The lower your DSO the better. And if it’s higher, there could be issues with your collection process, credit terms, or your customers’ financial situation.
- Bad debt ratio: This is one of the most important KPIs for accounts receivable that shows the proportion of invoices that remain uncollected and are written off as bad debts compared to total sales. A high ratio reflects lenient collection processes, lax credit policies, and even financial hardships of your customers.
- Collection effectiveness index (CEI): This is an important metric that shows the percentage of receivables collected during a specific period. A higher number means your team is doing a great job, while a lower number indicates bottlenecks in the AR collection process.
- Average invoice processing time: The time it takes to generate and send invoices to customers after a transaction is exactly what this accounts receivable metric shows. Delays due to any reason can lead to sluggish payment cycles, impacting the cash flow of your business.
Strategies to boost cash flow using accounts receivable data
Accounts receivable insights provide a comprehensive view of where you stand in terms of cash flow.
This data can help you create powerful strategies to achieve greater financial flexibility and bounce back to a positive accounts receivable balance. Let’s learn about some of these strategies in this section.
Conduct regular credit reviews
With data on payment behavior and credit reports, you can assess the financial reliability and creditworthiness of your customers.
Based on this data, you can also segment customers into different risk buckets such as low, medium, and high, identify potential risks, and take appropriate actions before they impact your cash flow.
For example,
For a high-risk customer showing signs of deteriorating financial condition, consider decreasing the credit limit or switching to a prepayment model. For those with low risk, providing flexible credit terms is an excellent way to encourage larger or repeat purchases.
You can conduct such reviews either at the start of a relationship, periodically, or after a customer’s business goes through significant changes such as acquisitions, downsizing, etc.
Incentivize early payments
With accounts receivable data at your disposal, you can have clarity on the payment patterns of customers. Identify the ones who have been regular with their bill payments and show your appreciation by offering discounts or other incentives.
Ensure that the incentives don’t go unnoticed – communicate them clearly on the invoices or during customer interactions.
This will help create a win-win situation, where customers benefit from the discount, and you continue to receive timely payments.
Be proactive with payment reminders
Sometimes customers miss out on payments inadvertently. When there are 100 things to do, it’s natural for a few to get swept under the rug.
By analyzing accounts receivable data, you can find customers who are prone to delayed payments and send them reminders or push notifications well before the due date. Define the intervals, say 1 week or 4 days before the due date, and also set the frequency of reminders.
When sending payment reminders, ensure that they are tailored differently for different customers.
For example, for first-time customers, it’s crucial to provide clear payment instructions, while for long-term customers you can be friendly or conversational in your tone.
You can also include payment links and provide options for paying through bank transfers, credit cards, and online portals, among others, to make sure the process is quick and convenient for your customers.
Follow-up on overdue accounts
Another great way to accelerate business cash flow is by automating and customizing follow-ups for overdue accounts.
Based on customer profiles, payment patterns, and overdue amounts, you can set automatic email/SMS reminders and customized follow-ups, to increase the chances of timely payments.
The best way out here would be to group customer accounts into categories based on the number of days overdue, such as 1 to 30 days, 31 to 60 days, and so on.
For early stage overdue, send polite reminders, highlight payment terms, and offer all the assistance customers need.
For those with significant overdue amounts, personalized follow-up messages work well as they help you recover payment quickly while also emphasizing how much you value the relationship.
When handling overdue accounts, enquire about what’s hindering customers from making payments and provide options like installment plans and extended deadlines to speed up the process.
Keep a check on invoice accuracy
Many times, delayed payments are a result of invoice errors, such as wrong customer details, incorrect figures, missing information, etc.
Accounts receivable data can help you track down any errors or inaccuracies in invoices and address them proactively, speeding up the payment process.
Another way out is to standardize the invoice templates and have a clear-cut breakdown of charges, due dates, and payment instructions. This helps avoid confusion and reduces the likelihood of errors in the invoices.
Renegotiate payment terms to address late payments
For customers with recurring late payments, renegotiating payment terms can be a practical solution.
With the data on late-paying customers at your fingertips, you can identify the reasons they tend to pay late and offer alternative solutions that suit them better.
By renegotiating the terms of payment and bringing them in alignment with customers’ financial situation, you can ensure cash flow continuity and minimize future risks.
For example,
For high-risk accounts, you can reduce the credit limit or make prepayment mandatory for customers.
Such proactive measures will help you reduce the recurrence of payment issues, while at the same time ensuring your relationship with customers remains strong.
Keep your business financially fit with AR insights
A positive cash flow is essential to thrive, and accounts receivable analytics is key to achieving this.
AR insights offer detailed information about the areas where your money is stuck, payment patterns of customers, inefficiencies in your collection processes, and much more. Using these insights, you can identify bottlenecks and develop pragmatic strategies to ensure your business always has a steady inflow of cash.
By enhancing AR collections, your financial standing strengthens, which directly impacts your business operations, investments, and growth.