Let’s get back to talking about cash flow. And let’s bring the focus to Accounts Receivable. Ready? Here we go.
Remember THIS article, where we identified seven major areas that can affect cash flow? Accounts Receivable is one of these areas. So, let’s go into a little more depth about the ways in which you can influence and improve your cash flow through greater focus on your Accounts Receivable.
In essence, optimal management of your Accounts Receivable will help to shorten your cash conversion cycle.
Starting up a new business gives you the opportunity to set practices for your business in a way that benefits you most. There is no rule that states you must carry out your business as tradition decrees. If there are advantages to be had by moving away from what you’re used to, implement these measures from the start.
What is Accounts Receivable?
Accounts Receivable is the term given to clients who owe you money. Improving your Accounts Receivable is the not-so-simple matter of collecting those payments sooner. To do this, we must first delve into what happens in advance of the client owing you money. This is the standard process:
- Client engagement
- Delivery of services
- Invoicing of services
- Payment terms and methods available
- Debtor management
Your client engagement process, from prospect through to confirmed client, should be handled as efficiently as possible. The sooner you can engage your client, the sooner you can get the work completed and the sooner your client can be invoiced.
The engagement process should precisely lay out the expected deliverables, as well as the expectations you have of your client. It should also include your expected payment terms. Show in clear terms what the client is expected to pay for, including things like travel, accommodation and other expenses incurred in the course of performing the work
Delivery of Services
Ensure you are geared up to deliver your agreed services efficiently. Efficiency is achieved through the use of well-documented processes and methods of delivery with measurable costs and results. It’s imperative to deal with any roadblocks to efficient delivery through proper processes and contingency plans. This will ensure you’re able to deliver services in a timely manner, which is an important part of shortening the working capital cycle and ultimately, your cash conversion cycle.
Invoicing of Services
Determine the best invoicing methods for you and your business needs. Traditionally, providing business to business services meant billing for the service at the end of the month, or on completion. Realistically, how essential is it for you to invoice in this manner? Could you instead invoice for services up front?
You might look into split invoicing as an option. Something like 50% payment upfront and 50% on completion. As long as you’re transparent with your clients, you can determine the way you invoice for your work.
The objective here is to get your invoices out as soon as possible, simply because people can’t pay for something they haven’t been invoiced for.
Payment terms and methods available
Hopefully, your client is aware of your payment terms because they have been made clear through the client engagement process in the beginning. However, it’s important that the terms are reiterated on the invoices sent to your clients. Occasionally, clients may request something outside of your usual payment terms. Before granting them exceptions, you need to understand the implications of such different payment terms on your cash conversion cycle.
Also, consider how easy you make it for your client to pay you? Do you give them more than one option to pay? From cash to bank deposits, Paypal, credit card and Bitcoin, there are so many ways for people to hand over their money. By limiting the methods of payment you make available, are you limiting how quickly people can pay your bill?
In an ideal world, you’d structure your business so you have no monies owed to you by clients, ensuring all services are paid for upfront. However, if you are unable to make this happen, make sure you have a well-documented Debtor Management process. This should keep track of follow-up methods and frequencies, including escalation to a collection agency. Your process should also detail how to deal with clients who routinely pay late, and regular assessment of your clients’ payment records to ensure you are not working with clients who don’t pay you.
Everything we just mentioned is what we call “optimising your Accounts Receivable” and it’s a vital part of shortening your cash conversion cycle. If you can eliminate or minimise Accounts Receivable, you will have more time to focus on the other ways cash flow can be improved, which we’ll explore in the next few blogs in our series. Stay tuned.