From XU Magazine, 
Issue 28

Is Your Working Capital Actually Working for You?

Strategies for Optimizing Your Accounts Receivable

Overdue invoices and lenient credit terms might help you close sales, but they can also lead to your customers treating you like a bank. Here’s some quick hacks to reduce your overdues, enhance your working capital and help you grow your own business.
This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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Make Your Working Capital Work for You

Businesses are expensive to run. Long-term debts aside, you have a lot of short-term financial obligations as well. Things like utilities, office rent (maybe less of an issue in a work from home scenario), permit renewals, inventory top-up, machine/technology repairs and employee salaries are just some of the many costs involved in running a business.

But how do you fund working capital? Sure, you can take a loan or a line of credit, however this can turn out to be expensive.

The smart thing to do is to rely on something that you know will come to you in a steady – and obligation-free – manner. We’re talking about your accounts receivables.

Why is accounts receivable so important for your company?

Accounts receivables represent future income and fall in the asset column of your balance sheet. Accounts receivables, which are cash or cash equivalent in nature, make your company highly liquid - which makes your business solid. 

Risks to your cash flow: threat of default

As with any debt, there is always a non zero risk of default. 

Some of the causes can be:

  • You don’t have a strong follow-up policy in place
    While many customers don’t wait until your reminder to pay, there might be a few who don’t bother paying you for your goods/services until the due date is well past. If you don’t have a way to track and follow up your account receivables, you may have a default on your hands.
  • Your focus is on sales alone and not the overall wellbeing of the company
    If the customer who is defaulting is an important buyer with big orders, you may hesitate to push back and ask for payment. But this isn’t advisable, since sales are useless if you don’t get paid for them.
  • Your invoicing & billing system doesn’t help you get paid faster
    With so much work on your plate, it’s understandable if your billing or invoicing system doesn’t help you collect payments faster. However a lack of an effective automated collections integration can cost you and your business since it prevents you from getting paid faster.

Optimize your account receivables and never experience a default again with these hacks

• Make accounts receivables a collaborative effort between accounts, sales and finance teams

Accounts receivables is seldom just the sole responsibility of the finance team. The work of multiple departments in the business can have an impact on  how quickly you get paid.

Sometimes, sales teams decide the payment terms they offer customers before consulting the finance departments. This can actually hinder company profitability if terms are unfavourable. Similarly, if finance puts a restrictive limit on the customer credit, it might affect your relationship with paying customers too.

This is why it’s really important to bring the accounts, finance and sales teams together, so you can collaboratively decide what payment and credit terms will work.

• Make working capital a KPI

Key Performance Indicators are extremely important metrics that businesses study closely to understand their profitability. When you use working capital as a KPI, it ensures that you and your busines keep a close eye on the working capital.

Working capital comprises accounts receivable, accounts payable, cash assets and inventory. When you’re using working capital as a KPI, you’ll break-down the figures to understand what parts of your working capital are underperforming. If there is an issue with the accounts receivable, you’ll be able to dig deeper and identify issues like late payments, unreconciled accounts, write-offs and so on.

• Put in place a credit approval system before you grant customers credit

One of the ways to create a credit approval system that works well for both the company and the customer is to bring the sales, finance and accounts teams together.

Once you do have your credit limits and credit terms set, it’s important not to administer a one-size-fits-all policy. It’s necessary that you implement a Credit Score Card to chart the creditworthiness of each customer.

• Automate bill & invoice management & overdue reminders
A significant portion of accounts receivable issues occurs in the billing stage. Manual entry can lead to errors. There is also a chance that your team may forget to create an invoice on the day of the sale or they may forget the terms of the sale and create an incorrect invoice.

This is where automation can have a material impact.
- Automated invoice generation that occurs through an electronic billing system, as and when an order is placed.
- Dedicated member portal, which contains each customer’s account information - customers can download bills, raise reconciliation requests and make online payments.
- Business-side bill/invoice management technology that allows you to manage exceptions like discounts, rebates and credits.
- Automated reconciliation of payments at invoice level

In reference to the business-side invoice management technology, it’s a best practice if you track payments through individual invoices and not by entire customer accounts.

Customers will have many invoices to their name. It isn’t necessary for the customer to make his payments through the same payment mechanism each time. It also isn’t necessary for the customer to receive the same payment terms, the same credit or the same discounts each time. When you track payments based on the customer account, there’s a chance that you may miss out on invoice-specific receivables. This is because they are different from what is typical with that customer.

Automating payments reconciliation based on individual invoices will ensure you don’t miscalculate anything and you don’t have to spend hours every day trying to assess the true AR position of any account.

Strengthen your company’s accounts receivables processes

Finally, one of the best ways to optimize your accounts receivables and ensure you make your working capital work for you, is to review and strengthen your entire receivables process.

  • Create a process that is flexible enough to deal with different circumstances without compromising on your own financial security. Eg:
  • Create specific processes for B2C payments and B2B payments.
  • Keep track of all credits, offers, rebates and payment terms and use technology to monitor if they have been applied correctly.
  • Train all relevant employees in both the technical skills and people skills needed to deal with difficult customers..

Optimizing accounts receivables isn’t too difficult if you know what to do. With some smart hacks you can ensure that you get the money you are owed and your working capital works for you, not your customers.

Why leave it there?

To download the full toolkit including a special COVID Collection Call Script & Email Templates that help you get paid

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