Accounts Receivable Management to Boost Cash Flow

Accounts receivable management plays a pivotal role in the financial health of small to medium sized Denver and Colorado businesses. Managing outstanding invoices effectively can mean the difference between steady cash flow and financial stress. For many business owners, the accumulation of unpaid bills from clients can hinder their ability to cover daily operational costs and invest in future growth.

The Federal Reserve’s Small Business Credit Survey (SBCS), conducted in late 2023, highlights the prevalence of this issue. Nearly half (49%) of small business leaders report experiencing uneven cash flow, and 52% face difficulties in paying operational expenses. These problems are often exacerbated by inefficient accounts receivable (AR) processes, where overdue invoices lead to cash flow gaps. These gaps can make it difficult for businesses to manage routine expenses, fund growth initiatives, or even meet payroll obligations.

Adopting effective AR management practices is crucial for mitigating these challenges. By optimizing AR processes, businesses can ensure timely invoice collections, maintain a more predictable cash flow, and reduce the financial strain associated with late payments. Effective AR management not only bolsters the immediate financial stability of a business but also lays the groundwork for long-term success by providing the resilience needed to weather economic fluctuations. 

Best Practices for Accounts Receivable 

1. Run a Clear AR Process – Having a well-defined AR process is fundamental to effective AR management. This involves setting clear policies for credit, invoicing, and collections. A standardized process ensures consistency, reduces confusion, and enhances efficiency across the board. Additionally, training staff involved in the process ensures they understand the procedures and can handle collections efficiently. They can also manage the AR process, identify potential issues early, and maintain professional and positive interactions with customers.
2. Build Customer Relationships – Strong customer relationships are crucial for timely payments. Communicate your payment expectations clearly and regularly with customers. Establishing a dialogue can prevent misunderstandings and delays, ensuring that customers are aware of their obligations and the consequences of late payments. It is also recommended that businesses diversify their client base. While large clients may have extended payment terms, balancing them with smaller clients who pay on shorter terms can help maintain healthy cash flow.
3. Increase Automation – One of the most effective strategies for improving AR management is automation. By automating invoicing and payment reminders, businesses can streamline their processes, reduce human error, and easily issue timely payment reminders. Research indicates that leveraging automation can reduce Days Sales Outstanding (DSO), thereby improving cash flow.
4. Simplify Invoice Payments – Making it easy for clients to pay invoices is another important step. The SBCS data shows that 80% of small businesses accept checks and 74% accept credit cards; however, only 56% of firms accept payment through Automated Clearing House (ACH). By implementing electronic payment methods like ACH, businesses can expedite collections and reduce the administrative burden on staff.
5. Promote an Early Payment Discount – Offering early payment discounts, such as a 2/10, net/30 discount, can incentivize quicker payments. While it may seem like a financial concession, the benefits—improved liquidity, reduced Days Sales Outstanding (DSO), decreased risk of bad debts, and strengthened customer relationships—often outweigh the discount given. With more than half of B2B invoices being paid late, providing such incentives can be a game-changer.
6. Follow-Up on Past-Due Invoices – Timely follow-up on overdue accounts is critical. A structured follow-up process ensures that overdue payments are addressed promptly, preventing receivables from becoming bad debts. This proactive approach is essential for maintaining a healthy cash flow.
7. Offer a Payment Plan – For customers experiencing cash flow challenges, offering a structured payment plan can be an effective solution. This approach allows businesses to receive payments over time while accommodating the financial situations of their clients, thus maintaining strong customer relationships.
8. Create an Accounts Receivable Aging Report – Regularly reviewing aging reports allows businesses to monitor outstanding invoices and address potential issues before they become critical. An aging report categorizes outstanding invoices based on how long they have been overdue, typically segmented into 30-day intervals (0-30 days, 31-60 days, 61-90 days, and over 90 days). This helps businesses identify which invoices need immediate attention and allows for targeted follow-up actions. By automating this type of report, it can become a weekly checkpoint for AR staff. 
9. Calculate Your Accounts Receivable Turnover (ART) Ratio – The Accounts Receivable Turnover (ART) ratio measures how efficiently a company collects its receivables. It is calculated by dividing net credit sales by the average accounts receivable. A higher ART ratio indicates efficient collection processes, while a lower ratio suggests potential issues with collections. Regularly calculating this ratio helps businesses evaluate AR management performance and make necessary improvements.

Additional Key Performance Indicators to Monitor:

• Days Sales Outstanding (DSO): Measures the average number of days it takes to collect payment after a sale. Lower DSO indicates faster collections.
• Collection Effectiveness Index (CEI): Measures the effectiveness of the collections process over a specific period.
• Bad Debt to Sales Ratio: Indicates the percentage of receivables written off as bad debt compared to total sales. Lower ratios suggest better credit management.
• Average Days Delinquent (ADD): Measures the average number of days that receivables are past due.
• Receivables Turnover Ratio: Indicates how many times receivables are collected during a period. Higher ratios indicate efficient collections.

Contact Us

Businesses are encouraged to explore and implement these strategies to improve AR processes and cash flow management. Small changes can often have a positive impact on cash flow management. If you have questions about the information outlined above, or need assistance with another outsourced accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.