Freeing up working capital can help businesses fund growth, reduce debt levels and lower costs. One way to improve working capital is by managing your accounts receivable.
Many businesses fall into the trap of poor accounts receivable management, for various reasons from extending credit to customers, to ignoring payments terms to guarantee a new sale. These behaviours and behaviours like these can quickly cause disastrous effects on your cash flow.
There are a number of strategies you can practice to improve your accounts receivable process, including:
Customer credit approval policies
One great strategy is to create a clear customer credit approval policy before entering into any business deals with a customer. By assigning credit limits, payment terms, discounts and return policies to specific customers, you are protecting yourself from getting caught out. Introduce a system to determine a new customer’s creditworthiness, such as background and credit history checks.
Criteria for approving or rejecting requests for credit
Reviewing your credit approval process is an essential component of business, as a customer’s financial situation may cause a change to warranting a reviewal of their credit terms.
Sound invoicing procedure
One of the necessary strategies to maximise accounts receivable is to establish a solid invoicing and billing procedure, as generating timely invoices is a major aspect of collecting account receivables on time. Do your research and create a strategy that works best logistically for your business; perhaps it includes a staff member taking on this role, or perhaps you will look for automated options. Sending electronic invoices is ideal as it fast tracks the process due to reduced delivery time.
Efficient collection process
Developing a collection process for all staff to follow will increase efficiency, ultimately resulting in improved management of accounts receivable. You can do this by training all staff on the necessary process for collecting money owed, and train them in how to deal with difficult or noncompliant customers. They should be aware of how to apply discounts, how to negotiate payment plans, and how these aspects should be sufficiently documented.