Randy J. Elder, CPA, P.C.

Accelerate Your Receivables: Improve Cash Flow

Cash flow

I’ve written about the importance of cash flow to small business before. Because the management of your cash balance is so important to small business and can make the difference between success and failure, it is worth a closer look.

You can tackle cash flow management from a couple of different angles such as increasing revenue, reducing expenses or improving your management of accounts receivable. In fact, for many small businesses one of the easier ways, and sometimes overlooked, to improve your cash position is by accelerating your accounts receivable. I am quite confident that if you asked a handful of small business owners to name the top obstacles they face in their quest for ongoing profitability, the vast majority would point to slow payments. While a focus on receivables can be a good way to improve cash flow, it requires constant and diligent monitoring. Here are some tips for accelerating your accounts receivable and improving your cash balance.

Start with timely invoicing

Starting here is important. I’ve seen too many businesses fall behind on invoicing. Not only is this likely to impact your ability to get paid on time, it also sends the wrong message about how you run your business. However, if you’ve been in business for any length of time you know that timely invoicing isn’t enough. You can’t just sit back and expect that the payments will arrive on time. Here are some additional tips to help you get the money your business is owed into your account on time.

Send accurately invoices the first time

This is another factor that can impact not only your receivables but also your business image and reputation. If there are too many instances of invoice errors, you are likely to lose on both fronts. If you’ve issued a bill with errors, your customer can wait until payment is almost due to dispute the charges. As a result, they are likely to gain an additional 15 or 30 days to pay the amended bill, and you lose out on the use of that cash in the interim. Make sure accuracy is a top priority and that the invoice amounts are checked and verified. If possible, have a second person do the verification.

Accept, facilitate and encourage customers to pay invoices electronically

Most businesses have moved to electronic payments. Make it easy for customers to do business with you and set this up if you haven’t already. If you already have electronic payments set up but not all of your customers are using this method, be sure to encourage them to do so. Maybe even provide your clients with some incentive for switching to electronic payments.

Use financial reports to closely monitor your accounts receivable

You should be monitoring your accounts receivable including details on the terms, due date, bill date, aging and open balance. Identify warning signs for late payments and repeat offenders and address promptly.

Send statements

If your review of accounts receivable reports uncovers some customers who are late on their payments, consider sending them statements in addition to your invoices as a gentle reminder. You can list invoices submitted, credit memos and payments received.

Offer discounts for early payment and assesses finance charges

Let’s face it, most of us are motivated by money; both positively and negatively. You may want to offer customers a discount for early payment and penalize those who pay late by assessing late charges. This approach can be a bit of a balancing act both concerning the amount of money you receive as well as in customer goodwill. Before implementing these policies, you’ll want to take a close look at the net impact to your cash flow and seriously consider any negative impact on customer relations that could result.

If you have any questions about cash flow management or accelerating accounts receivable, please contact me.